House of Commons Business and Enterprise Committee

Pub Companies

Seventh Report of Session 2008–09

Volume II Oral and written evidence

Ordered by The House of Commons to be printed 21 April 2009

HC 26-II [Incorporating HC 1183-i, Session 2007-08] Published on 13 May 2009 by authority of the House of Commons : The Stationery Office Limited £0.00

The Business & Enterprise Committee

The Business & Enterprise Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Business, Enterprise & Regulatory Reform.

Current membership Peter Luff MP (Conservative, Mid Worcestershire) (Chairman) Mr Adrian Bailey MP (Labour, West Bromwich West) Roger Berry MP (Labour, Kingswood) Mr Brian Binley MP (Conservative, Northampton South) Mr Michael Clapham MP (Labour, Barnsley West and Penistone) Mr Lindsay Hoyle MP (Labour, Chorley) Miss Julie Kirkbride MP (Conservative, Bromsgrove) Anne Moffat MP (Labour, East Lothian) Mr Mark Oaten MP (Liberal Democrat, Winchester) Lembit Öpik MP (Liberal Democrat, Montgomeryshire) Mr Anthony Wright MP (Labour, Great Yarmouth)

Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via http://www.parliament.uk/parliamentary_committees/parliamentary_committees

Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/bec

Committee staff The current staff of the Committee are: Eve Samson (Clerk), Janna Jessee (Inquiry Manager), Louise Whitley (Inquiry Manager), Anita Fuki (Senior Committee Assistant), Eleanor Scarnell (Committee Assistant) and Jim Hudson (Committee Support Assistant).

Contacts All correspondence should be addressed to the Clerks of the Business and Enterprise Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5777; the Committee’s email address is [email protected]

Witnesses

Tuesday 18 November 2009 Page

Mr Brian Jacobs, Fair Pint Campaign, Mr Clive Davenport, Chairman for Trade and Industry, Federation of Small Businesses, and Mr Paul Daly, Publican, Zigfrid and Roadtrip Ev 1

Mr Martin Willis, Chair of the Trade Related Valuation Group, Royal Institution of Chartered Surveyors, Mr David Morgan, Chartered Surveyor and Mr Simon Clarke, Publican and qualified Chartered Surveyor Ev 10

Tuesday 9 December 2009

Mr Rob Hayward, Chief Executive, British and Association, Mr Nick Bish, Chief Executive, Association of Licensed Multiple Retailers and Mr John McNamara, Chief Executive, BII Ev 19

Mr Giles Thorley, Chief Executive and Mr Giles Kendall, Regional Operations Director, Punch plc, and Mr Ted Tuppen, Chief Executive and Mr Simon Townsend, Chief Operating Officer, Enterprise Inns plc Ev 31

List of written evidence

Page

1 National Parliamentary Committee of the Guild of Master Victuallers Ev 46 2 Brian Jacobs Ev 47, 52 3 Kossway Ltd Ev 68 4 Karl Harrison Ev 71, 75, 76 5 Rose and Crown Ev 78 6 Interpub plc Ev 79 7 Association of Licensed Multiple Retailers (ALMR) Ev 81, 89, 90 8 Memorandum submitted anonymously Ev 95 9 Winter Hill Consultancy Ev 97 10 Enterprise Inns plc Ev 98, 104, 111, 117 11 Mark Charman Ev 119 12 Campaign for Real (CAMRA) Ev 120 13 Herefordshire and Worcestershire CAMRA Ev 123 14 Admiral Taverns Ev 124 15 Sarah Ferdinand Ev 128 16 The Duke Public House Ev 128 17 Simon Clarke Ev 134, 137, 139, 143, 145 18 British Association of Pool Table Operators (BAPTO) Ev 146, 147 19 Federation of Small Businesses Ev 149

20 OSO Pub Company Ev 152 21 Graham Brown Ev 155 22 The Crown and Town Hall Ev 156 23 The Woolpack Ev 157 24 Borough Arms Ev 158 25 Jeff Rosenmeier Ev 159, 160 26 Punch Taverns plc Ev 161, 167, 177, 179, 183 27 Memorandum submitted anonymously Ev 183 28 The British Beer and Pub Association (BBPA) Ev 184, 189, 190 29 BII Ev 191, 193, 194 30 Business in Sport and Leisure Ev 196 31 Marston’s Pub Company plc Ev 197 32 Memorandum submitted anonymously Ev 203 33 plc Ev 204 34 South Council Ev 210 35 Royal Institute of Chartered Surveyors (RICS) Ev 213, 214 36 Peal O’ Bells Ev 215 37 Fair Pint Campaign Ev 219, 223, 226, 231 38 Stephen Broadhurst Ev 237 39 Federation of Licensed Victuallers Associations Ev 241 40 David Morgan Ev 243, 247, 248 41 The Progressive Pub Company Ltd (PPCL) Ev 248 42 Justice for Licensees Ev 251 43 Society of Independent Brewers Ev 254 44 Camelot Inns Ev 256 45 The Swan Inn Ev 257 46 Paul Daly Ev 259, 260 47 Eddie Cant Ev 261 48 Memorandum submitted anonymously Ev 261 49 Inez Ward Ev 261, 265 50 Anne Hewitt Ev 265 51 Mr and Mrs K Hutton Ev 266 52 JAT Leisure Ev 267 53 Shepherd Neame Ev 267 54 Nigel Wakefield Ev 268, 270, 272, 273 55 Memorandum submitted anonymously Ev 274 56 Memorandum submitted anonymously Ev 275 57 Good Pub Guide Ev 277 58 Office of Fair Trading Ev 277 59 Licensed Trade Charity Ev 279 60 David Law Ev 279 61 Dovedale Towers Ev 281 62 The Royal Oak Ev 282 63 Robert Milroy Ev 282

64 Gareth Thomas MP, Parliamentary Under-Secretary of State for Trade and Consumer Affairs, BERR Ev 282 65 Lisa Smith Ev 283 66 HMRC Board, London Ev 283 67 Chris Swift Ev 284 68 All Party Parliamentary Save The Pub Group Ev 285 69 Association of British Insurers Ev 289 70 PubCo Licensee Survey by CGA Ev 290

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Business and Enterprise Committee: Evidence Ev 1 Oral evidence

Taken before the Business and Enterprise Committee

on Tuesday 18 November 2008

Members present:

Peter LuV, in the Chair

Roger Berry Mr Mark Oaten Mr Brian Binley Mr Mike Weir Mr Lindsay Hoyle Mr Anthony Wright

Witnesses: Mr Brian Jacobs, Fair Pint Campaign, Mr Clive Davenport, Chairman for Trade and Industry, Federation of Small Businesses and Mr Paul Daly, Publican, Zigfrid and Roadtrip, Shoreditch, gave evidence.

Q1 Chairman: Good morning gentlemen. This is our Q4 Mr Hoyle: It is good to see you again; it soon first evidence session of this inquiry into pubcos. As comes round. always can I begin by asking you to introduce Mr Jacobs: It does not seem like four years ago that yourselves and then I will ask a general question I was here. about the state of trade in the pub industry first before we go into specific questions on pubcos. So can I begin by asking you to introduce yourselves for Q5 Mr Hoyle: That leads me into a very good the record? question. What do you think has got better and Mr Jacobs: I am Brian Jacobs. I am a certified worse for the industry, in particular for tied tenants? accountant and I have 50 years experience in the Mr Jacobs: If you take the whole trade for one trade. minute, what has happened to the whole trade is that Mr Davenport: I am Clive Davenport; I am with the non-smoking introduction and with the chairman of the Trade and Industry Policy Unit for credit crunch trade is down across the board. For the the Federation of Small Businesses. I do not have tied tenants it is even more diYcult because they any experience in the trade. have fixed rents whereas if you are a freeholder you Mr Daly: My name is Paul Daly. I have been a do not have that situation. That is the downside; I designer for 15 years in the trade in . I have cannot really say that there is an upside. owned my own bar, free of tie, for 5.5 years and I opened a tied bar three months ago. Q6 Mr Hoyle: There is nothing positive? Mr Jacobs: Nothing positive at all. One of the big Q2 Chairman: Mr Jacobs, you speak as well for the diYculties of course is that one has to recognise that Fair Pint Campaign. the pubcos have a mountain of debt and they are Mr Jacobs: That is correct. trying to service that mountain of debt. Unfortunately they are trying to service it out of a Q3 Chairman: Do you want to make any general trade which is in fact slowly imploding through the comments about the state of trade in the pub weight of taxation, legislation and the general industry at present, not specifically relating to tie credit crunch. issues and pubcos but more generally about the Mr Davenport: We did a survey of our members who other issues that you face? are involved in the public trade and 99% of them said Mr Daly: Trade generally is down at the moment. I that the situation had not changed since 2004. That would say of the big companies Weatherspoons is is a fairly high proportion, 99%. probably the only one that is up because they do pass Mr Daly: At the moment we have to raise our game on their discounts and their retro discounts to their in the trade. One of the ways of doing that when you customers. are free of tie is that you negotiate deals with your Mr Davenport: The British Beer and Pub brewers. If you do go into a deal with a brewer they Association statistics say that beer sales are down can give you all sorts of discounts and incentives 7.2%, beer sales in are down 8.1%, even which you can pass on and trade on the ground level. supermarkets are 6% down; the beer tax black hole You can raise your game and oVer more. You in the Treasury is set to reach £1.2 billion. cannot do this in a tied venue. Chairman: This is a narrowly focussed inquiry on a Mr Jacobs: I do think that if the pubcos had adopted very specific issue but we are obviously well aware of the Trade and Industry Select Committee’s all the problems facing the pub trade and we are recommendations of 2004 back in 2004 there would considering how we should respond to that. We are be fewer pubs closing today. The economic situation now going to focus questions on the particular issues dictates that rent should be going down but in fact in our inquiry. Lindsay Hoyle? they are still putting rents up on the basis of RPI Processed: 07-05-2009 20:10:33 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 2 Business and Enterprise Committee: Evidence

18 November 2008 Mr Brian Jacobs, Mr Clive Davenport and Mr Paul Daly annually. If rents are going up at RPI and turnover Q11 Mr Hoyle: So they have a double-headed coin is going down, there is only thing that is going to and only the pubs are allowed to have tails. happen, pubs are going to close. Mr Daly: Eventually he is going to give up going to arbitration. Q7 Mr Hoyle: We can see that in our own constituencies from the boards showing closed or Q12 Mr Hoyle: Would it be fair to say that lease for sale. Is the revised code of practice working previously the business development managers were and being applied by the pub companies? the most hated people within the tenancies? Have Mr Jacobs: The BBPA was the first to issue a new relationships improved or do you think they are just code of practice following your recommendations. as bad as ever? The interesting thing is that when the BBPA actually Mr Davenport: In the survey we did we asked three issued that code not one of your recommendations questions. One was about the benefits available for was taken on board other than upward only rent tenants such as training, business support or reduced review but even that they altered. They altered that rent, had that been balanced and 96% of the by putting in a barrier at the bottom saying, “it shall recipients said no. That is a fairly damning not fall below the lease rent”. That is crucial because indictment across the board. I think this is the the possibility is that it can down and if it goes down advantage of the survey that we did, that we were not the rents should go down below whatever the lease looking at specific areas, it is right the way across the says. All the pubcos followed and did use and have country—England and —and all sorts of V used the BBPA code of practice as their anchor di erent types of pubs so you are getting a much point. When asked “Why haven’t you adopted the more balanced view from that than individuals. Trade and Industry Select Committee recommendations?” the pubcos say, “We adopt the Q13 Mr Hoyle: So the enemy is still the business code of conduct in line with the BBPA and as far as development manager. the Trade and Industry Select Committee Mr Davenport: Yes. recommendations are, that is all they are; they are Mr Daly: Some of them are nice people, but they are only recommendations and we do not have to take just working for the man and the man just tells them any notice of them”. to up the rent or collect the rent, chase you up in some way. I asked my BDM1 what my rent review might be like and he said, “I’ll basically send you a Q8 Mr Hoyle: Would it not be fair to say that there letter that says I’m increasing your rent three-fold are still some upward only rent reviews in existence and you will have to argue against that.” and the clause has not been removed? Mr Jacobs: Fair Pint did a survey and 51% of the Mr Jacobs: Fair Pint carried out a survey and quite tenants said they hardly ever or never see their a sizeable number said that the increases had BDM; 83% said that the BDM does not oVer them continued to go up; 28% said they still had the any genuine guidance. It would appear that today upward only rent reviews and 58% said they had V the general role of the BDM is to collect debt rather su ered an RPI increase. than to oVer support. There is no partnership between pubcos and tenants. Q9 Mr Hoyle: Do you think Enterprise Inns misled the Committee because they stated to my question Q14 Mr Hoyle: How many people have ended up on about it that as soon as legally possible they would the street? Have you any evidence of that? remove that clause and yet they are the company Mr Davenport: I personally did a survey which was a that still have that clause within some of their very good survey. When you are doing personal pub tenancies? surveys it is a wonderful life. On a serious note, Mr Jacobs: What is interesting is that they have in several in one area came to me to make the some cases removed the clause by negotiations for point about a specific pub in their area. They were one reason or another but very often that has been very angry about it because over the previous eight substituted by other things like an additional tie in years five tenants had gone into there, so they were your wines, an additional tie in your spirits. on an average of about an 18 months turnover of Therefore, although they give with one hand, they tenants over that period of time and one of those take away with the other. tenants committed suicide. That is about as bad as it is going to get. Q10 Mr Hoyle: Would you say they take more with the other? Q15 Mr Hoyle: It does not get any worse than that. Mr Jacobs: They always take more. Mr Davenport: No, it does not get any worse than Mr Daly: I am designing a venue at the moment for that. a client who is an Enterprise client. He struggled for one reason or another and it ended up that they Q16 Mr Hoyle: Do you have any figures of how renegotiated his lease because of that struggle. They many times the local authority has had to house implemented an RPI index linked yearly rent review people who have become homeless because of these which means that should he should to go arbitration companies? he will have to do it every year and that is a very expensive business. 1 Business Development Manager Processed: 07-05-2009 20:10:33 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 3

18 November 2008 Mr Brian Jacobs, Mr Clive Davenport and Mr Paul Daly

Mr Davenport: I do not have a statistic for that. Pubcos are eVectively buy to let tenants; that is the way their business is run, they buy a property and Q17 Mr Binley: I want to understand a little more they lease it out. Their interest is not in , it is about how good or bad the relationship is between not in producing a good relationship with their tenant and BDM because that is crucial to the whole tenants; it is just recovering as much money as they business quite frankly. We have some evidence can on as regular a basis as they can so they can pay which I will read out: “Whilst being open and we the overheads they have. The overheads they have at have been bullied, threatened and harassed by their the moment, the gearing ration is enormous, a 70% unscrupulous credit team and target led area mark up. managers”. Can I ask how general that statement is, how much it can be applied and how relevant it is to Q19 Chairman: What you have just said is the the breadth of the trade? answer to the question I was going to ask you, but Mr Daly: I have only been trading now for three why are pubcos treating their tenants so badly? They months with Enterprise but obviously as a designer are happy to see so many tenants fail but that should I design for other people. This particular pub I am not be in their interest. doing in Crouch End at the moment in north Mr Davenport: You are quite right, it should not be London the BDMs were particularly heavy handed in their interests. The driver is the coin at the end of to the point that when we were trying to renovate the the day, that is what it is all about. Margins are what pub they would not allow them to move the python. it is all about. They know they still have an asset and The python is the large snake like thing that all the they can still sell that asset, it may be reduced beer comes through from the cellar. They would not because of the market as it is now and that is why let them move that for one reason or another which they are having huge pressures now. Like any buy to held up the whole process of refurbishing the venue. let the real value of their property has gone Mr Jacobs: I cannot actually give you physical dramatically down and that has caused and is evidence to support what you are saying but I do get causing them enormous pressure. I think a lot of phone calls frequently—half a dozen a week—from what was happening in the past and what is various people phoning up and asking for assistance exacerbated now is down to the margin. regarding their future. I cannot give them any assistance because nine times out of ten—more than Q20 Mr Oaten: I would like to have on record the that, probably 99 times out of 100—they are too far number of pubs which are disappearing. Mr Jacobs gone, they are beyond saving. They are talking to me said interestingly that if the Committee’s about having to pay in advance for their supplies, recommendations had been put in place you do not they have to get money, find money, take money out think so many pubs would be disappearing. I spent of the takings or whatever, go along and physically Thursday night working behind the bar in a pub in put the money down, get a receipt for it before they my constituency which was a fascinating experience, can even place an order. I gather that in certain parts but I was left with the clear impression there that the of South Wales as many as 50% or 60% of tenants landlord would be quite happy to disappear and may are actually having to face this type of credit have to do that to get out of the business. Roughly harshness and really you cannot survive that. It is a how many pubs are disappearing each week? form of harassment. Mr Davenport: On average 27. Mr Jacobs: That is one figure that has been quoted. Q18 Mr Binley: In the old days the relationship in Recently the BBPA quoted 35 per week. the tied trade between the district and area manager Mr Davenport: It is accelerating. and the tied tenant was a regular one, they saw them Mr Jacobs: Unfortunately the BBPA and the pubcos very often and it was a very supportive one based on, are trying to blame it all on the free of tie pubs. They in many respects, mutual advantage quite frankly. say it is only the free of tie pubs which are closing. If Are you telling me that that relationship has broken you look round to your own constituencies and your down sizeably in your experience? own areas you will see that that is a total nonsense. Mr Jacobs: In my experience that has gone and gone forever. When the brewers who were actually Q21 Mr Oaten: Can you give me a figure? What manufacturing the beer had this relationship percentage are free of tie? through their tenancies there was a whole regime, a Mr Jacobs: I would say that if you took that 35 paternalistic approach to how tenants would run probably five would be free of tie and 30 would be their pubs, they used to know the names of the the tied. I think that is more likely to be the truth but tenants, their families and children and so on. They I have no actual physical evidence. used to look after them. However today I am sorry to say, I am an accountant, but accountants have taken the pubs away from the brewers, they have put Q22 Mr Oaten: Does anybody have any accurate them into the pubcos and they run them like a data on it? financial vehicle. They are not interested in them; Mr Davenport: There is no accurate data. All I know there is no justification for the tie. is that in the local area where I live the ratio is Mr Davenport: If I could just add to that, the basically that. It is a huge ratio of tenancy pubs fundamental thing here is that in the old day the being closed. What the pubcos do do as well is that common aim was to sell beer so pub landlords and if a tenant walks away they put in a holding brewers were working together to a common end. company to keep the pub going. They have a totally Processed: 07-05-2009 20:10:33 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 4 Business and Enterprise Committee: Evidence

18 November 2008 Mr Brian Jacobs, Mr Clive Davenport and Mr Paul Daly diVerent set of rules when they are operating under Q26 Chairman: Is there any pattern between urban that agreement anyway. There is a totally diVerent and rural areas that you are detecting? Is there any set up there. distinction? Mr Jacobs: I have not looked at rural areas as against city areas. I cannot really give you an answer V Q23 Mr Oaten: We can split o the pubco ones on that. which are disappearing, in how many of them do Mr Davenport: I have anecdotal evidence but it is they use the tenancy period when it ends to shut the only that and I would not like to use it. We do not pub? Or how many is it where the tenant just has to have statistical evidence for that. give up? Mr Davenport: I think there is a high ratio of the Q27 Mr Binley: Would you be able to send that to tenants actually walking. us because it really does break down the structure of Mr Jacobs: I think that 35 are the tenants walking. rural life in rural areas. That is the diVerence The pubs are closing and the people going away, between rural and urban in this respect. going to the local authority and saying they are Mr Jacobs: The diYculty is actually getting to the homeless and asking for a roof over their heads. statistics. The BBPA will probably have the Mr Davenport: The pub that I was talking about information and the licensing authorities. where there were five in eight years, every one of them walked; one of them did not walk, obviously. Q28 Mr Oaten: On the rent side of it, I think the Fair Mr Daly: In a lot of these cases because of the Pint survey said that 91% of tenants said they felt personal guarantees that people have undertaken it their establishment was over-valued. means bankruptcy so they lose other assets, their Mr Jacobs: Yes. house for example. It is not just walking away; it is much more sinister than that unfortunately. They Q29 Mr Oaten: Can you tell me a bit more about bear down until the end. that? What is behind that? Mr Jacobs: In many cases the pubcos have a two Mr Jacobs: The basic problem is that the pubco year insurance policy so that if somebody walks out valuers and arbitrators basically ignore the value they still get the insurance company to cough up the formula which says that the tied tenant should not rent for two years, so therefore they are not worried. be worse oV financially than if they were free of tie. It is the poor tenant that gets kicked out who has to It is as simple as that. That is easy to prove. You start find a roof to go over his head. They are the ones V with a model that shows you what it would make if who are su ering. it were free of tie and you see what it would make if Mr Davenport: It is the tenant who pays the it were tied. You alter the equation so that the tenant insurance. should not be worse oV. Valuers will not accept that. As long as valuers will not accept that the rents for Q24 Mr Wright: You give the figure of 30 tied and the tied premises are going to be too high. It is as five free would close, how many of those 30 would simple as that. actually be let in a very quick period of time? Mr Jacobs: They are closed. There is another Q30 Mr Oaten: Does anyone else want to comment statistic that I cannot get hold of of pubs which are on that? in a transitional period. They are not surviving. The Mr Daly: I have direct evidence of that. In my case tenant goes and they find someone else to handle it Enterprise have the head lease with Hackney quickly. That one goes and they find another one. Council and they pay £1000 a year and they charge They just keep it going. We do not have a statistic for me £26,000 a year. So that is 2,500% profit. But in that but we know it is big. We know it is big because, my free of tie venue the cost per square foot is £23 as Clive said, a pub in his area had five management (this is the trading area) and the tied venue is £25 per changes but those five management changes are not square foot. So the rent is more in the tied venue and clocked up on the 35 closures. It is far worse. It is you have to deal with the tie on top of that. The rent much, much worse. The 35 is just the tip of the is more per square foot than the free of tie venue. iceberg. That is very important. Mr Daly: Even if they are rented out again, which some of them might be, there is still somebody who Q31 Mr Oaten: Am I right in thinking that one of the has gone out of business, somebody has gone problems with this process is that when somebody bankrupt, jobs have been left. takes on or begins negotiations to take on a pub they are not actually given access to the previous tenant’s profit and loss figures even though they are meant to. Q25 Mr Wright: Is that another incentive for the Enterprise, for example, are telling us in a pubcos to actually get rid of a tenant who quite memorandum that that is something which is clearly has gone bankrupt in many cases and then available. What is going on? How widely available is put somebody else in his place so they can reopen the the previous tenant’s profit and loss to the new whole thing again and pay the bills? tenant when it comes to that negotiation? Mr Jacobs: They are only interested in collecting Mr Jacobs: That is a very important aspect because money to service their debts. Punch have got about if the incoming tenant knew how the preceding £4.5 billion of debt; Enterprise I believe is about £3.5 tenant was performing and what his financial billion. It is a lot of money. position was he would look at it in a totally diVerent Processed: 07-05-2009 20:10:33 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 5

18 November 2008 Mr Brian Jacobs, Mr Clive Davenport and Mr Paul Daly light to how very often they do. I think that is manning do you require and what are your probably the reason why pubcos do not actually overheads to work out profit, and from that the release that information to incoming tenants. profit should go directly to what the rent should be. Mr Daly: As a free of tie tenant I had a call made to Q32 Mr Oaten: Do they or do they not? Enterprise me by the valuers who are doing rent reviews for say that best practice is to do so. other people in Hoxton Square in East London. Mr Jacobs: Best practice is double talk. Best practice They ask me what my rent is and I would obviously is what should be done; it does not mean it is done. tell them, so there is a way of finding out what a free of tie rent is. They then use that as a comparable and Q33 Mr Oaten: So on the record you are saying that that is the way it should be done so they end up with Enterprise do not actually do what they say they do. the market price. Mr Jacobs: That is my opinion. Mr Daly: I have some direct experience of this. I had Q38 Mr Wright: Why do prospective publicans enter to pursue the previous tenant and then he was not into beer tied tenancies? very forthcoming for some reason. I had no figures. Mr Daly: They do own so much of the stock that it becomes a law of averages thing. In my case it was Q34 Mr Oaten: Clive, do you have anything to add advantageous to me from a staV point of view to on that? have another bar near my free of tie bar. I wanted to Mr Davenport: No, we do not have any stats on that. expand, I wanted to employ more people; I am an employer, I want to grow. There was not much stock Q35 Mr Binley: There has been a change because available that was not free of tie. As I started trading barrelage was discussed between new tenant in within that I saw more and more sinister ways of relation to the district manager and the rent. We how they get money out of you, hence why I am here. used to talk about a 250 barrels pub or a 270 barrel Mr Jacobs: Between pubcos and brewers they pub; does that not happen any more? account for about 70% of the total pubs on the Mr Jacobs: To a degree that still happens. The market, 30% free of tie. Therefore if you are looking problem is that one measure—barrelage—is not to acquire trading premises, there is your market. suYcient to define whether the pub is financially The market is very narrow for the free of tie so viable because there are so many other elements. therefore you are almost forced into a corner; you You can take two pubs side by side, both doing 200 have to go to pubcos or brewers to get a pub if that barrels. One can be 10,000 square foot; one can be is what you want, or you have to go to that very, very 5000 square foot. One is carrying 10,000 square foot narrow market and wait until something comes of overheads—heating, lighting, so on and so available. forth—the other is 5000. One is making a profit, one is making a loss. The rates should be the same. That Q39 Mr Wright: Some of them have a cooling oV is what the pubco would say. period so that if there are particularly problems after, say, three months, you can release yourself Q36 Chairman: I want to ask you a technical from that particular tie. Why is that something that question really. If the free of tie landlords do not people do not do? Is the cooling oV period too short have to declare their rents, what comparables can we a time? actually use to judge whether a tied rent is Mr Jacobs: The cooling oV period is very short. reasonable or unfair? Generally speaking when you get into a pub the very Mr Jacobs: It is quite easy to justify whether a tied first thing you do is sort out all the inherent problems rental is reasonable or fair relative to a free of tie of customers, of suppliers, of staV and so on, taking pub. You can look at what the barrelage is, you ask in all the legislation on the way. The first three what discount there is and they will tell you what it months are spent just trying to get hold of the reins is. What can you obtain in the open market? They of this vehicle. The next three months you are going will give you a specific example. Say they have given to try and steer it in a direction. The next six months you £40 a barrel but in the open market you can get you will start to know whether you have made the £100 a barrel, the diVerence is £100. Two hundred right decision or not. The following 12 months you barrels, £20,000. That is your wet rent. What are you will know. It is a bit like trying to teach somebody paying as a lease rent? £20,000. So the total rent is how to run a pub in three months. £40,000. Question: is the free of tie pub—if it were free of tie—paying £40,000? If the answer is less, they Q40 Mr Wright: So you are saying the three month are charging too much. It is quite a simple equation. cooling oV period is worth nothing at all. Mr Jacobs: It is bizarre. Q37 Chairman: Giving the declining importance of Mr Daly: If you put your life long earnings into your beer sales in many pubs’ revenues, perhaps new life you are not going to leave in three months. restaurant leases might often be a comparator? If you have renovated it, presumably bought the Mr Jacobs: Not necessarily. The whole concept of fixtures and fittings or bought new ones and rents in the pub industry is that it is profit based so everything else it all has to be entered into the therefore when you calculate the profit you calculate equation. In my case I spent quarter of a million. the turnover of the food, the accommodation, the Mr Davenport: You are still in a positive mindset at AWP machines, the beer, the wines, the spirits, the that point in time because it is new, you have just minerals, the lot. That is your total turnover. What taken it over and your life is changing. Three months Processed: 07-05-2009 20:10:33 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 6 Business and Enterprise Committee: Evidence

18 November 2008 Mr Brian Jacobs, Mr Clive Davenport and Mr Paul Daly is nothing. You have not even worked your way Mr Davenport: It would render the situation more around the pub yet; you do not know where all the honest because the pubcos would be what they are nooks and crannies are. and that is property dealers and not brewers at all.

Q41 Mr Weir: Mr Daly mentioned earlier that Q44 Mr Wright: Is that one of the reasons, because personal guarantee is given by publicans who take of this huge capital asset that is out there—9000 over pubcos. Is the reason why people go to pubcos companies—there is always going to be some because it is cheaper to start oV there and then in equivalent of pubcos. many cases to buy a non-tie pub? Mr Daly: It would re-balance without a shadow of a Mr Jacobs: It is not so much cheaper, it is the choice doubt in a very short amount of time. They will tell available. If there are a thousand pubs on the market you that they cannot do it. One minute they will say and ten of them are free of tie but they are freeholds “We tie everybody in” and the next minute they will as against the other 990 which are leaseholds, you say, “We don’t know how our model will work would go for the leasehold. You are then faced with without the tie”. How come the CEOs and chief the situation where you are going to take those executives do not know that? Of course they do. premises on because that is what is available. Q45 Mr Wright: If the beer tie was to be kept all Q42 Mr Weir: I understand that, but is there a other ties such as non-alcoholic drinks and substantial diVerence in cost between taking on a amusement with prize machines would be aVected. freehold pub? Mr Daly: Going back to your question about the Mr Daly: In the free of tie area you can negotiate. If rural pub, people work all day, they sit down in the you are a good negotiator you can negotiate up to a evening and have four pints or whatever, they go for year’s rent free, which is what I did. This is very, very the beer; beer is their mainstay of the time. For important factor. You go into a place where you example, the percentage charged on Carling is 61% negotiate with the landlord, he or she owns the more for my beer tied venue. The tied venue charges building. They understand that you have a lot of 61% more so they choose the big products for the energy for the business. You come in and you add a maximum yield. The hit the most popular beer in lot of value in that first year. Whereas with a tied England the hardest, then the , et cetera. oVer you are paying rent immediately, so from the Mr Jacobs: It is the beer tie that is the killer for the get-go the rent is direct-debited in a non-negotiable tenants because so often the actual dry rents are situation. In actual fact, in some cases it is a lot closer to those of a free of tie pub, therefore the sum cheaper to get in in a free of tie if you add it up at the of the two make them just uneconomic to run. end, if you look at the bigger picture, the end game. Freedom of tie would in fact open up the Mr Jacobs: There are also some examples where opportunity for more pubs to actually survive. local authorities own pubs and they rent those pubs Mr Davenport: I am in danger of becoming the to brewers and to pubcos. Those pubcos then lease statistics expert here, but in our survey we asked that them back on. They rent it for £1000 or £5000 a year question and 94% of recipients said that they would and the pubcos take possession of it, add a tie and support the removal of the tie. All of those are charge £20,000 a year rents. If an individual could landlords so they are looking at it in a rounded way get to the local authority they would have got it at about their business, asking would it be good or £1000 a year but the opportunity is not always there. would it be bad and 94% are saying it would be good.

Q43 Mr Wright: What would be the consequences of Q46 Mr Wright: For that one thing to happen, the removing the beer tie? Would that remove the low removal of beer tie, that would in your opinion help cost entry into the pub industry? towards reversing the decline of the pubs. Mr Jacobs: I think if the tie were removed there Mr Jacobs: It would be a whole new injection. would be a greater opportunity for people to get in Mr Daly: It is an outdated model, it is over. It is not because the market would be opened up much if, it is when. better. Yes, it is possible that some of those rents Mr Davenport: One of the points to make is that may go up as against what they are on a tie basis. Weatherspoons, the most popular chain, is a When I say rent, that is the dry rent rather than the diVerent model from pubcos. Weatherspoons are wet rent. It is possible that some of those may go up profitable, making a good deal of money doing it the but even if they went up for every extra hundred way they do it. Everybody involved in pubcos, from pounds that is available in profits the landlord may the statistics we have, is not making money, so there get 50 but the tenant would get an extra 50 and that is something wrong with the market. That is the would take them closer to survival that to despair. question that has to be addressed and resolved. Mr Daly: These are clever people. You do not build up a 9000 strong property company without being a Q47 Mr Wright: So what you are saying is, look at clever person. You know how to re-capitalise. The the Weatherspoons model. banks are doing it at the moment. You sell assets, Mr Davenport: The Weatherspoons model is a you re-capitalise the company. I would buy my head completely diVerent model in the sense that they lease in a second and I am sure there are a lot of own the pub and they own everything there is. They people who would do the same. You re-capitalise the buy for all of their pubs on a single market point so company and market forces take over in the way their negotiation ability is much stronger than any that they should now. individual. We need the colour of all those diVerent Processed: 07-05-2009 20:10:33 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 7

18 November 2008 Mr Brian Jacobs, Mr Clive Davenport and Mr Paul Daly pub landlords. We do not need to have 54,000 Mr Daly: And production of , which Weatherspoons around the country; I think we is a famous country for beer. would all go insane if that were the situation. Mr Jacobs: All the major sales in this country are Mr Daly: Their buying power is the same as from continental brewers now. Enterprise or Punch but they pass that discount on to the customers and then they get a retro as well which Enterprise and Punch do, but they do not pass Q51 Chairman: Presumably there are working men’s it on. We are paying huge prices for things that they clubs and sports associations and so on who would buy for nothing. For my beer tied bar I buy them rather benefit from investment in a freely entered 15% more than they buy them and I am making a into tie. 75% margin which I need to employ all those people Mr Jacobs: Very often that type of club gets a very et cetera. They are buying it for even less than I buy it large discount from brewers. Historically, years ago, then they charge you 61% more. It is pure extortion. they used to get what used to be called a free trade loan but that got knocked on the head with beer orders and the rest of it which I am sure you are Q48 Mr Wright: Finally on this particular point, in familiar with because you were involved. terms of AWPs in pubs do they contribute Mr Daly: If you do not cut the tie completely, if the significantly to the income of the pub? company is not an actual they will work out Mr Jacobs: AWP machines can contribute some way of out manoeuvring and us yet again. So significantly to the smaller pubs, there is no doubt it has to be just cut. about that. One of the big problems with the AWP machines is that the pubco charges the machine operator a royalty for citing a machine in the pub. Q52 Chairman: If we turned pubcos into literally buy The supplier adds that royalty into the rents, so the to let landlords who have no interest in the use of the rent to the pub goes up with the pubco taking their property, just to derive maximum value from it, piece. When the machine is emptied, as a generality, what would the consequence be? Would there be the pubco takes a slice of that machine income as it is alternative uses for pubs you can think of? Mr Davenport: There are already alternative uses. I emptied and the rest of it is left with the tenants after V deducting the rent, VAT and so on. What is left with can think of four in Cardi alone that have been the tenant is then calculated in the tenant’s profit and converted into flats. The very large Victorian monolith hotels are all being converted into flats loss accounts and the rent for the pub is justified on V 50% of that profit. So they have taken a further 50%. because it is cost e ective to do it because you cannot By the time they have added all those percentages up make any money out of those at all. Mr Daly: A lot of them have big gardens so you can the pubco is taking something in the order of 80% or V 85% of the total takings of that pub. That is not a get the a ordable housing in there too; you can get partnership situation; that is not fairness. the whole ratio. Mr Jacobs: The other issue of course is that although pubs could have an alternative use, the actual Q49 Mr Binley: The whole concept of the beer tie tenants may be in there with a lease that says they leads right from the very beginning to a dishonest shall operate that premises as a pub and nothing else. relationship between brewer and tenant. Is that not From the pubco point of view—particularly the real concern? When that is linked to long term Enterprise rather than Punch, so I will use leasing and the previous tenant who has run a pub Enterprise as an example—they do not have a down (because it is not just like leasing property, you managed division so under the Landlord and Tenant are leasing a business and you are leasing the good Act they cannot go and kick a tenant out when it will of that business) and who easily fell out with the comes to the end of their lease; the tenant has the brewery because of that relationship and that right to renew. Seeing that they have the right to repeats itself, it could be argued that the beer tie is renew, that will be a pub and will trade as a pub until bad for the pubcos as well. such time as that tenant says, “I will give it to you Mr Daly: Totally, you buy that bad will. It is back”. At that point the pubco would have the impossible to get rid of that ghost. opportunity of saying they will convert it into flats or whatever. Mr Daly: Sometimes you can buy a tenant out of a Q50 Chairman: Can I just clarify what you are lease. saying about the beer tie, is it specifically for pubcos Mr Hoyle: We have also seen other pub car parks or totally? where the have become small housing estates even if Mr Jacobs: I am saying that beer ties should be it has been a successful pub because they have had a extinguished across the board with one exception. better oVer from building companies. We have also There are small brewers out there with less than 500 seen McDonald’s taking over pubs. They are always pubs—some of them are in 20 or 30 pubs—but they looking for alternatives so it does not really matter. brew a specific beer for their location, their area. It is market forces that dictate it. They are very personal; they are run on a personal basis very much like the paternalistic brewers of years past. Those should be allowed to continue Q53 Roger Berry: It seems to me that tenants need a because it is in the interests of promoting the decent trade union here. If I am a tenant and I am establishment of beer in areas which are individual having problems with my pubco, where do I go for to that area. support? Processed: 07-05-2009 20:10:33 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 8 Business and Enterprise Committee: Evidence

18 November 2008 Mr Brian Jacobs, Mr Clive Davenport and Mr Paul Daly

Mr Jacobs: There is nobody out there. Mr Davenport: There are so many vested interests with a tied situation and that is where the problem Q54 Roger Berry: There is no organisation out there lies. to help? Mr Davenport: As an organisation we are closely Q58 Roger Berry: Could I ask about rent review? Mr looking at it because, during the survey, we realised Daly, in your evidence earlier on you referred to the how little support there is for publicans. It is quite situation where a tenant might not go for a rent incredible. You automatically think—well, I did— review because if they did they would have to do it of the Licensed Victuallers Association but that on an annual basis. virtually does not exist any more. We are looking at Mr Daly: Yes, that was a client of mine. His previous what sort of package we can put together to try to partner was struggling with the rent so consequently oVer some support for them ourselves because it is a he was in a weak position. The BDM out- dire situation. manoeuvred him and negotiated a much more severe Mr Jacobs: People think that the BBPA would be tie so he was not only tied for beer he was suddenly the ideal vehicle but it is not because they are only tied for wine and all sorts of things. So he increased there for the interests of the brewers and the pubcos. the tie and they also increased the rent reviews to They are not interested in the tenants. yearly RPI index. What happened was very onerous, just because he was weak. The partnership fell out of the window on that occasion. Q55 Roger Berry: In the evidence from the British Beer and Pub Association they say that the revised code of practice oVers its services to “take on the role Q59 Roger Berry: What about the opportunity for of intermediary to resolve and misunderstandings” arbitration on rent reviews? but it has not actually received any requests to act in Mr Daly: He was weak. If you go back to the whole that capacity. Is this true, that the organisation rural thing some people do not have a lawyer. Some claims its job is to act as intermediary to facilitate people do not reach for their lawyer; they do not pick resolving problems and misunderstandings and yet up the telephone. They try and negotiate things it is perfectly clear that nobody is using them? Is it themselves and all sorts of things happen and they really like this? are out-manoeuvred. There are 9,500 of them. Mr Jacobs: They claim to represent the tenants and the retail trade and yet when you stop and look at it Q60 Roger Berry: How can that be made easier for there are 9000 managed houses out of 56,000 and the the tenant? How can the tenant’s case be made companies that own those 9000 are members of without prohibitive cost when it comes to rent BBPA. There is nobody that is a member of the reviews? 56,000; they claim they are because they own Mr Daly: I think it should be illegal to do that another 30-odd thousand. That is where the problem without a lawyer present. If a guy is weak, it is either lies. They claim they own it and they give the illusion eviction or he does this; he has two choices. that they have an interest, but they do not. They are not interested in how a tenant survives at all. Q61 Roger Berry: He would have to pay for a lawyer. Q56 Roger Berry: Do you think therefore there Mr Daly: There could be some sort of body that needs to be a tribunal system and, if so, what should helps with that. In that extreme situation there could it cover? be a trade body or something available. Mr Jacobs: I think it is possible to set up a tribunal Mr Jacobs: I think the fundamental problem is that system but I think that the tribunal system would rents have historically not been constructed on a probably only work if there was not a tie. I do not fair, open, transparent basis. The two think it could possibly work if a tie exists. One of the recommendations in the last report, 144 and 145, set other benefits of removing the tie is that you remove out so clearly what should be done: full detail, the conflict within the valuer’s situation; it has gone, prudence, knowledge, fairness. Everything was in there is no conflict. Yes, you could have a tribunal there. All that had to be done was for it to be but if you did have a tribunal I would say it should be followed. If that was followed most of the tenants manned by the three prime disciplines: accounting, when it came down to actually looking at their rent valuers, legal. It should be manned by those three review would understand all the little bits that made somewhere down the line. You should not let the it up and they could argue on the basis of openness valuers have their own way and you should never let and transparency. That cannot happen as it is at the accountants or lawyers have their own way either. moment. The big problem with arbitration of course is that arbitrators are primarily valuers who are Q57 Roger Berry: I would like to know if Mr Daly indoctrinated into the principle of ignoring the value and Mr Davenport agree with that. equation. Mr Daly: The answer is you will come back in so there will not be an us and them scenario as much Q62 Chairman: Can I just ask if you are aware of because they would be property people, that is what pubcos ever deliberately misrepresenting to new they are. They would be able to readdress that tenants the history of a pub? balance value-wise of their companies and then it Mr Jacobs: I cannot actually give you any examples would be much more open book. personally, no Processed: 07-05-2009 20:10:33 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 9

18 November 2008 Mr Brian Jacobs, Mr Clive Davenport and Mr Paul Daly

Mr Daly: They might not say something. struggling to see what you are asking Parliament particularly to do that will make the position of Q63 Chairman: The political lie, the sin of omission tenant fairer. rather than the sin of commission. Mr Jacobs: It is simple. One, remove the tie; two, Mr Daly: Yes. I do not have any personal make the Trade and Industry Committee’s experience. They might leave things out but I do not recommendations 1.44 and 1.45 a statutory know if they put things in. requirement. Problem solved because everything Mr Jacobs: I think if you look at the web pages of would have to be fair. companies like Admiral and Enterprise and Mr Davenport: I am no lawyer at all but when you deal between a tenant and a company you are probably Punch and so on and so forth, they will all V say in there “We are a partnership with the tenants”. entering into a contract e ectively. If that contract is That one word “partnership” suggests fairness; it damaged then you should be able to withdraw from suggests equality of treatment. We know that is not that contract. If that is the case, then tenants are not true so does that answer your question? able to do that so you are constraining the tenant beyond his abilities within open contract law.

Q64 Mr Weir: It seems fairly clear that there is an imbalance of negotiating power between tenants and Q67 Mr Weir: The theory about contract law is that the pubcos. I think that is something the last both parties entering into a contract do so freely and committee commented on. I have spoken to do so in a fair balance. From the evidence we are Consumer Focus about other matters and they did getting there is not a fair balance between pubcos make the point that small businesses do not have and tenants. consumer protection and they are not covered by the Mr Davenport: That is correct. Unfair Contracts legislation. I wondered particularly perhaps for the FSB whether you Q68 Mr Weir: It has been suggested to us, for looked at the rights of small businesses as consumers example, that perhaps the tenant should be able to of services from larger organisations and do you surrender a lease without a financial penalty or think there should be a business equivalent of the rather with a minor financial penalty by giving, say, Unfair Contract Term regulations? six months notice. Do you think that would be a fair Mr Davenport: That is a diYcult one because you way of allowing a tenant a way out of a 21 year have to be very careful about how you balance that contract? out between bias towards the small business and bias Mr Daly: I am saying get rid of the tie but you are towards pubcos shall we say in this case. Consumer saying should we fail to do that. protection—which is what it is eVectively—can cause you more problems that you created in the first place. I think an open market that is capable of Q69 Mr Weir: Yes. acting fairly and equitably within itself will level out Mr Daly: I did this initially completely oV my own fairly quickly the problems that there are occurring bat because I wanted to get free of the tie, but then I now. I do not think we need to have consumer started getting e-mails from people (because there protection. was a bit of press about my involvement) who had lost their houses, lost their lives, their family were all out, then it began to take on a bigger symbolic Q65 Mr Weir: Given the situation where there are meaning for me. I could just sell the lease and be massive pubcos and individual tenants, how do you done with it and go back to my free of tie lifestyle, achieve that open market without some sort of but I say you are right, if we fail—which we should regulation to give greater rights to tenants entering not do—those people should be allowed some into these contracts? Are there any particular terms respite from they hardship they have been put under within contracts that you think should be so they do not end up homeless. unenforceable by the courts? Mr Davenport: Because it is not equitable and under Mr Daly: Basically it is the tie. general English law equitability should be there and Mr Jacobs: When push comes to shove the whole it is not there at the moment. problem exists around the existence of the tie. If the Mr Daly: They should not just be ground to the dirt tie was not there we would probably not be having like they are, no way. this discussion because the pubs would be surviving and the valuers would be valuing on a fair, equal basis. Q70 Mr Weir: You would accept that there has to be a change in the law to make these contracts more fair then, going back to the original point? Q66 Mr Weir: I am somewhat surprised at your Mr Davenport: I am not going to make a answers because you have told us all through this commitment about whether there should be a that tenants are struggling because of the might of change in the law; that is not for me to say. the pubcos. I am asking you if there are any Mr Weir: I find that an interesting response. particular things in law that can be done to redress the balance and you do not seem to believe there are. You mentioned the ties and Mr Daly made a very Q71 Mr Binley: Was the balance between the tenant good point earlier on that the companies will re- and the landlord more even before the Monopolies balance your model to take account of that, so I am Commission and this place got involved? Processed: 07-05-2009 20:10:33 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 10 Business and Enterprise Committee: Evidence

18 November 2008 Mr Brian Jacobs, Mr Clive Davenport and Mr Paul Daly

Mr Jacobs: I would say it was fair then, yes, going Q74 Mr Weir: You are not calling for a general back to 1986 when the brewers were in the chair. The relaxation for brewers, but just to allow small strange thing is that the pubs were in a far better brewers— position and strangely enough the consumer had Mr Jacobs: Yes, 500 and less. much more care. Mr Daly: Actual brewers.

Q75 Mr Weir: I understand that, but the suggestion Q72 Mr Binley: So the lesson is, you are frightened is being made that it was much better when the of this place getting involved even further. brewers were dealing directly and I am just Mr Jacobs: That is right. wondering that that may be fine for small brewers Mr Daly: It seems to me like if you rented a house but I am not sure that some of the large international and you thought you were getting it for less rent but conglomerates would be any better. you had to buy all your food from your landlord and Mr Jacobs: The brewers looked after their tenants you were not allowed to go to Tesco, you were not and they looked after their customers; today you allowed to go to Morrisons, ASDA or anywhere. have none of that. That is just madness. Q76 Chairman: You are asking for brewers with Q73 Mr Weir: You are harping back to the golden 500 pubs. age before the Monopolies and Mergers Mr Jacobs: Five hundred pubs and less. Commission but has the brewery industry itself not changed in intervening years? There are much fewer Q77 Chairman: That is brewers with 500 pubs and brewers, they have become much more less or any brewer can have up to 500. internationalised. Mr Jacobs: A brewer can develop up to 500 but he Mr Jacobs: That is very true and I think that one of cannot have more. the things that removal of the tie for everyone except Chairman: Thank you very much indeed. If, on for the brewers with less than 500 pubs would in reflection, you feel there are things you did not have actual fact promote beer back into the country, back a chance to say or wish to clarify in writing, we are to its origins. Let us get the pubs back to their very open to your presentations. Thank you for origins; let us get the brewing industry back to its coming today; thank you for your written evidence. origins. We are very grateful to you. Thank you very much.

Witnesses: Mr Martin Willis, Chair of the Trade Related Valuation Group, Royal Institution of Chartered Surveyors, Mr David Morgan, Chartered Surveyor and Mr Simon Clarke, Publican and qualified Chartered Surveyor, gave evidence.

Q78 Chairman: Gentlemen, thank you very much producing valuation standards and guidelines. indeed for coming before us. Thank you very much Chairman: Thank you very much indeed. Brian for your evidence to us previously in writing; we are Binley? very grateful to you. Can I begin, as I always do, by asking you to introduce yourselves? Mr Clarke: My name is Simon Clarke. I qualified as Q79 Mr Binley: Is the current method of trade in a chartered surveyor in 1988. I have acted for pubs the best way to deal with the situation, to value landlords and tenants and I am now a publican of and trade in that respect? the Eagle. I am still a member of the RICS. Mr Willis: Are you saying the method of operating Mr Morgan: My name is David Morgan. I have a public house? specialised in all items concerning the leisure industry now for 34 years. I happen to specialise in Q80 Mr Binley: The whole business of trading pubs items concerning rent review. I am also perhaps to the tenant in the way you have just heard operates rather unique in the industry in that I have also and you know well. Is it the best way of dealing with owned a restaurant. I have happened to act as a landlord in a hotel and a pub and a pub, so I have this issue? been on each of the sides of the fence. I am also one Mr Willis: As far as valuation is concerned it is the of the founder members of Fair Pint. I also act for profits method of valuation regardless of whether the Licensed Trade Charity in items concerning rent the business is traded as a tenancy, as a leased pub review. The specialisation that I have is actually rent or a managed house. The same philosophy works review litigation. and the same valuation method works. The decision Mr Willis: I am Martin Willis. I am a Fellow of the as to whether a public house should be managed, Royal Institution of Chartered Surveyors. I appear tenanted or leased is down to profitability and the before you today as a representative of the RICS as threshold of profitability which will move it from Chairman of the trade-related Valuation Group. one sector to another. The RICS is an independent body regulated by royal Mr Morgan: I consider the existing method is charter with the objective of practising public good. eminently fair if it is operated in a fair, open and It is an internationally recognised organisation with transparent manner. Therein just lies the key, the a reputation and a long-standing policy of openness and transparency. Processed: 07-05-2009 20:10:33 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

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18 November 2008 Mr Martin Willis, Mr David Morgan and Mr Simon Clarke

Mr Clarke: I think it is the right method to use. The house. That is the trade that the reasonably eYcient problem is, as David so rightly says, that it is easily operator—that is a recent term that has come in open to abuse in that you have to consider the weight following the international valuation standard—will of the parties, particularly with a pub. On the one expect to achieve from those premises taking into hand you have a tenant who is probably a one-man account all of the circumstances of the facilities, band operating his own pub, he does not have a competition, location et cetera; running the business great deal of time, he probably has not got a lot of in a proper manner; and assuming the property is comparables to work on. On the other hand you properly repaired, maintained and decorated. That have a potentially multi-million pound company is the starting point of the profits valuation. You that has an open cheque book, a rent review then move down through the profits (P&L), through department specialising in purely this sort of thing. the gross profit, which will clearly take into account The weight is against the tenant at the outset. The any elements of the lease which bring in a tie. It will tenant, of course, could employ the services of a take into account discounts that are given and each surveyor but that is quite a costly experience, individual lease and each individual property will be particularly at the outset when you have a BDM diVerent. He will then work out the operating costs who comes in for a friendly chat to propose a of the business, that is all operating costs down to the rental increase. net profit before depreciation, tax and amortisation. To get to the rent there is a small adjustment then to Q81 Mr Binley: Is that the only time you see the take into account the working capital and the BDM? investment that the tenant has put into the business. Mr Clarke: I have only been co-owner of a pub for That leaves what is called the divisible balance. It is three years and we only really saw our BDM during that figure that is then apportioned between the the rent review negotiations. He has since moved on landlord and the tenant, the landlord for providing and we have a new one now who has been in since the property and the tenant for his risk and reward in the rent review. I have to say it probably suits us that running the business. The starting point is invariably we do not see that much of him, just as much as it 50/50 but there is no rule to say that it should be 50/ suits him not to come. We have no real benefit, I do 50; it will totally depend on the risk and desirability not think, from monthly visits. of the business.

Q82 Mr Binley: Another supplementary to that first Q85 Mr Binley: All this clever stuV then is primarily question, would valuers lose massive amounts of based in terms of the wet side on an imaginary figure. income if we changed the present structure in the Mr Willis: No, it is all forms of income to the public way that many believe would be for the better? house (letting, food, machines, everything); it is not Mr Clarke: Do you mean removal of the tie? an imaginary figure because the training for the chartered surveyor who is a specialist as a licensed Q83 Mr Binley: Yes. property valuer is to source his database, to source Mr Clarke: The valuation technique is the same other businesses and know what is going on in that really whether there is a tie there or not in that the particular area for that type of business. He will, if valuers, as said by Mr Jacobs earlier, do not possible, be given the actual accounts for the generally take into account the wet rent element. So business. Not all lease agreements require accounts when we come to a rent review situation today, be it to be put over but more and more often now free of tie or tied, the formula is based on the accounts are being requested and tenants are being turnover figure—an estimated turnover figure—and more forthright and putting their accounts forward. applied to that is a gross profit costs and at the end That will give a good steer to the actual costs but it is an earnings before income tax which is split is the fair maintainable trade, in the same way that between the landlord and the tenant. could be below or above actual trade. If you have an operator who is above average or an exceptional Q84 Mr Binley: So the wet rent element which is operator the fair maintainable trade will be below totally subjective as we have learned is totally within his actual trade; if the business is actually in need of the hands of the pubcos. You do not get involved in repair, maintenance, decoration or perhaps is not that element at all. being run to the most optimum level, then indeed the Mr Morgan: We have to interpret the circumstance fair maintainable trade might by higher. The most of the varying levels concerning the discounts important part of any valuer’s job is to read the oVered, if any, into the overall assessment market, analyse actual transactions (that will be concerning gross income. Having actually worked lettings and rent reviews), understand those out the fair maintainable trade in fact the next item transactions and apply that evidence to the along the line is actually the gross profit. That will valuation that he has before him. then be linked to the amount of the discount, if any, that the licensee then has. That is the area that Q86 Mr Binley: In your submission you talked about includes or excludes the wet rent factor. the appropriate gross profit margins. How do you Mr Willis: Wet rent and dry rent are trade terms; arrive at that if it is not imaginary? they are not actually recognised as part of the formal Mr Willis: It is factual. You can get hold of a price chartered surveyor training. As Mr Morgan has list; you can find out exactly what gross profit is quite correctly said, the principal evaluation to rent being made on any element. It is harder, admittedly, is to assess the fair maintainable trade for the public for food items because people could be buying from Processed: 07-05-2009 20:10:33 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 12 Business and Enterprise Committee: Evidence

18 November 2008 Mr Martin Willis, Mr David Morgan and Mr Simon Clarke cash and carry. The wet trade, if it is a full tie, the houses do this. You are on a complete loser to start pubco, giving a rent review will give him the with. Also—which then rather reverses the complete price list at that time and GPs can be question—you are informed of the actual amount of worked out. They are also, as I say, looking at other the rent in the first instance without any explanation businesses so there is a comparison approach which whatsoever. You are told, “This is the rent and that’s is a standard valuation approach, working all the what you’ll pay”, no explanation. That is perhaps a way through the profits valuation. longwinded way of answering the question.

Q87 Mr Binley: Is the role of the landlord a massive Q89 Mr Binley: I am grateful for that; thank you factor in this respect which you cannot assess? very much indeed. Mr Clarke, do you have anything Mr Willis: I am sorry, I do not understand the to add? question. Mr Clarke: We had our rent review due in November 2006. We started negotiations in May Q88 Mr Binley: Is the role of the landlord in running 2006. Initially the process is the BDM comes in and his pub and attracting business a massive factor in has a quick chat, probably about something else and assessing how a pub will do and how can you then slips in, “Oh, by the way, you’ve got a rent assess that? review coming up”. In our case the review was from Mr Willis: From experience, just walking round £52,000 to £59,000 which was RPI increases on the public houses. Any valuer who is a chartered original £47,000. If we want to have an argument surveyor who is a specialist in licensed property or about it there is evidence to suggest that it could any form of the profits valuation is covered by the actually be more than £59,000 but we are going to RICS rules of conduct and the guidelines and the get it all done and dusted and there will be no valuation information. Part of that is that he must be trouble. We actually requested at the outset a valid experienced. It is integrity and experience in client rent review notice. We had a letter from them service which are the fundamental key to the indicating there was a rent review due but there was chartered surveyor role. no proposed rent in that letter. I queried whether Mr Morgan: If I can assist in the overall aim of the that was in fact valid as there was no proposed rent. point, there is a considerable disparity between the It took two months before we physically got a rent actual accounts—in other words what the actual review notice that had a proposed rent in it. At this licensee or landlord does—and also what he is point we still had not got calculations to back that expected to do and herein lies a huge problem. The up. I simply dug my heels in and said that until I got pubcos have this assumption that the individual some sort of calculation I could not judge whether licensee should be, for want of another word, the that was right or wrong. Eventually that came perfect tenant. Say, for instance, your books show through and took the form of a very simplified that you are doing 50% worth at gross profit you are calculation, not dissimilar to one that I think you then told that you should be doing 56%. This is the have been circulated with today. Over the period whole substance of it. Having been informed of that then of the next eight or nine months the rent went and having then started oV a calculation from an from £59,000 to £54,000 to £52,000 (which was area that is not substantiated from the tenant’s actually our rent passing). All the way along this accounts, then having underestimated the overhead process we had said that whilst they had explained in costs specifically in the area that I find every single day is the underestimation of actual wages costs. I that ten and ten equals a hundred they had not told have over and over again the sort of mantra “That’s us where the tens had come from. We had no evidence to validate that. At that point we were what they do in managed houses” and I do not ever V get shown the managed house accounts that then o ered £50,000 (which is £2000 less than our existing would justify in a food-led premises where you might rent). Most people would say we should have bitten get wages rates anything from 26% to 35%, “Oh, the bullet there but we took it to arbitration on the they should be 15% because that is what we have in basis that no evidence had been put forward during managed houses”. You then start oV with a the whole process. It was only there that evidence complete disparity over how the thing is actually started to come to light and that was actually worked. The snag is that you then get the chartered supplied by allocated agents. The one thing I think surveyor or the surveyor—because they are not is important to make clear is that wet rent (it has the always chartered surveyor—who then represents the word “rent” so everybody assumes it is all calculated pubco. Surprisingly he will also have in his mind the in and it is part of the formula) is simply the amount perfect tenant and you have the situation where in the tenant misses out on in the form of discounts theory you should be guided by those accounts but because he pays over the odds to the landlord. When in actuality it is only just a starter for ten because at you have a free of tie tenant they pay a rent, using the end of the day you are informed of firstly the easy numbers, of £50,000; the same pub tied, the rent trade that you should do; secondly, the margins that may be £30,000 but the wet rent might be another you should achieve (and if you have not achieved it £30,000. That is taken out of the equation. You look then you are not a very good tenant); thirdly, you at it as a naı¨ve newcomer to the trade, see £50,000 ought to be running the place on an utter shoestring and £30,000 and take the £30,000. Nobody has really whereas in actual fact if you then have to say, “Look, gone into a great deal of depth in telling you that you here are the staYng rosters, here is how much it are actually going to pay another £30,000 in loss of costs”. That is irrelevant just because managed discount. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 13

18 November 2008 Mr Martin Willis, Mr David Morgan and Mr Simon Clarke

Q90 Mr Binley: It is sad that most people would not million pounds. As the conversation starts I always have your ability to argue on that basis and simply ask the same question, “Have you been shown how take what the pubcos tell them. the actual rent was worked out?” Answer: “No”. Mr Clarke: I think most tenants probably do and I This happens every single instant that I can think of, am sure questions will be raised as to why more do with certain exceptions. The exceptions are— not go to arbitration. I think it is simply a massive surprisingly, but they are—in fact the little regional misunderstanding of how it all works. I am a brewery companies, some of whom are particularly chartered surveyor but I had not actually been punctilious about being able to present exactly how involved in pub valuations until our rent review they got to where they got to. Yesterday I had three commenced. referrals; none of them had had any explanation whatsoever as to how the rent was done. They were told, “Here is the rent”. In that situation you do not Q91 Mr Wright: If we turn the clock back to where get the good cop/bad cop scenario. You start oV with the predecessor committee actually made certain a hugely high amount of rental hidden always recommendations which have not been ultimately behind the laptops; the laptop hides any form of carried out and one was about the transparency of calculation. Some people actually sign up to that the valuation process, obviously you have just huge amount of rental, but that is just a few. There is explained that process. How can we actually make it then the negotiating stance: “I will then come down more transparent so that people are aware of how because I like you. I will go and fight your cause. I they come to these rents? Do the pubcos want to hide will go to the top and I will make sure you are really this so that you are not aware as Mr Clarke’s looked after.” That then comes down to the second experience demonstrates? level of rental. Then there is the third level of rental Mr Willis: Taking the gentleman’s point about the and if they really had to be pushed to get there then tenants being left in the dark, there are a couple of that is what they might just settle at. The interface, points that need correcting. The rent review because it is adversarial, is the BDM or BRM. They mechanism is built into the lease. When the rent review notice is due to be served and whether it are obviously in the business to get the highest rent should state a rent is a factual matter from the lease. they are able to get. They are looking after The pubcos and the smaller have been shareholders’ interests and their own job; they are taking on improved codes of practice and quite a not there to cut the rent down. If they are able to get as high as they are able to, they do. In the instances number of the pubcos now, including some of the V smaller brewers, have been through the BII that I have had which have e ectively ended up in accreditation scheme which marks them and scores arbitration, you never, ever have the comparables in them on addressing certain issues from your any form from the pubco representative; they do not previous committee. Certainly one of the points is exist. There was one that I handled last week where that tenants should be given the breakdown of the we knew that the pub within half a mile was in the rental proposal. DiVerent companies provide that at hands of the same pubco. I happened to know the diVerent stages and certainly a number of the pubcos new tenant in that particular pub. I asked the have actually address chartered surveyors in the representative what was the rent from the pub next industry explaining how that will be presented and door. He said, “I can’t tell you. It’s completely what will be included in it. That is a starting point. confidential.” And so the scenario goes. There is no It is not perfect and they are not all doing it, but a transparency; it does not exist. major number of them are now and they specifically Mr Clarke: I do not have a great deal to add to what want that breakdown. So that is the first stage, the David has said, however, to answer your question on tenant actually understanding where the pubco is how there can be more transparency a couple of coming from on rent. The issue of comparables and things immediately spring to mind. If there were evidence is a fundamental of valuation. It is not good some form of central register of transactions that practice, as in Simon’s case, for anybody to run all took place be they new lettings, lease renewals, rent the way to arbitration without presenting reviews, then I think that would open up a great deal comparables. It is absolutely fundamental to dig out of evidence for a lot of people because it would be comparables at the turnover level, the gross profit publicly available. When there is an arbitration the level, the profit level and the rent level. They may be arbitrator at the end of the whole operation would diVerent comparables for the diVerent levels of the issue an award. Included in that award would be his valuation. They are the market transactions. All the valuation after seeing both parties’ the submissions. chartered surveyor’s role is is to read the market and That should be publicly available and easy to get apply those terms and to help the client if it is a hold of. At the moment it is very diYcult to get hold tenant or indeed the tenant should be able to of. More to the point, if pubcos want to argue that understand and ask questions from seeing the they are being more transparent, when their BDM breakdown of the valuation. goes into that initial meeting he should say, “Here’s Mr Morgan: The reality, however, is considerably your new rent, it’s a little bit more than you were diVerent. The situation exists that I have probably expecting I know” and if the tenant says, “Can you every day three to five standard referrals nationwide tell us, for example, the five nearest pubs to me that and they come from all elements of the industry, own? You’ve got 7500 pubs, you must have a couple from those who are in particular trouble through the of pubs nearby that you can tell me what sort of Licence Trade Charity, from others who have huge barrelage they do? Can I have the names and phone leased houses, some in fact with turnovers of over a numbers of the licensees so I can ring and talk to Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 14 Business and Enterprise Committee: Evidence

18 November 2008 Mr Martin Willis, Mr David Morgan and Mr Simon Clarke them myself and ask what rent they are?” The improved, but there is nothing to stop a licensee argument would probably be that a degree of that himself going and talking to his local competitors would be confidential accounting information, but about rent and things. Certainly as a valuer you the pubcos themselves will tell you that they would would do it; you are there and it is part of your use the barrelage figures if the pub was going to go training to resource evidence in the market and on the market, it would be included in the property analyse that evidence. particulars. You would be able to look immediately Mr Clarke: It should be said that there is a register and see that that pub does 250 barrels, that pub does for residential premises so I cannot see where there 200 barrels, that one 350 barrels. What is the cannot be one for pubs. diVerence? That one has a better location, this is Mr Morgan: The helpful factor of having a bigger, whatever. In our situation we have a pub register—which I wholly support—is that if you directly opposite also owned by Enterprise Inns. We have three pubs as indeed Martin was saying you can asked repeatedly for the detail of that rent review get a distortion. If you have 30 pubs they tend to which was two years prior to ours. Their rent review even out a little bit. If you have 300 pubs you then is £36,000; we were already paying £52,000. That get a general tone. If you have a whole stack of pub is bigger, has a car park and has game machine comparables they generally tend to form a pattern incomes. Why is ours more than theirs? Show me the and you can interpret the pattern as you will. analysis of it, that is all we ask. We never got that. Obviously the tenant does not want the rent to go up and the landlord does. If the evidence is en bloc you Q92 Mr Wright: Again our predecessor committee have anomalies which I would completely concur recommended an itemised register of pub rental with, but the general image of that particular tone is assessments that would be concurred across the of assistance. board. Mr Morgan: That would be fantastic but that does Q94 Mr Hoyle: Is it normal for commercial leases to not exist. be linked to the RPI? Mr Willis: The RICS would not agree to that. There Mr Clarke: For commercial leases it is perhaps not is no rental register for any form of commercial normal. In the pubco leases it is extremely common. property (oYces, shops, industrial properties). There are rental indices which show direction of Q95 Mr Hoyle: That has replaced the UORR. movement of rent but no specific register. The Mr Clarke: The UORR is the up and only rent reason for this is that no two properties are the same; review clause. In our situation we have an no two leases are necessarily the same. In the public inflationary increase every year and in the fifth year house sector we have a great plethora of diVerent we have an upward only rent review clause included agreements and leases ranging from the six month in our lease. I have to say at this point that we went tenancy right through to 20 or 21 year leases. Each to arbitration, we argued that our rent should be of those has diVerent terms; each of them has reduced and it was reduced accordingly. The upward diVerent tie provisions. We come right down to the only rent review clause is still in our lease despite the issue of tenants’ improvements. There was an fact, as you mentioned in the earlier session, we were example given to you in the earlier session of a rent told by Mr Harrison that it would be removed as of £1000; that was probably a ground rent, it was not soon as legally practical. a commercial rent for the public house. There was an example given to you of a rent on a commercial Q96 Mr Hoyle: In 2004 it was Enterprise Inns who property value to square footage which was stated that and you were successful in taking probably a shell rent where the initial tenant had to Enterprise Inns on that issue. go and fit out the premises. Without putting all of Mr Clarke: It was interesting because in our this evidence on the register it would be a very simple particular situation I think it was all down to the thing that a little knowledge is a very dangerous reading of the lease. The arbitrator’s role, had he thing. It is exactly the reason chartered surveyors been instructed to establish the rent under the terms train and go through their training and gain their of the lease, his conclusion would have been: despite experience in order to analyse transactions. I have to the fact he knows it should have been less it would say, from a personal point of view, if I am acting for have been the same (£52,000) because it is an upward a tenant I go and actually talk to the nearby public only rent review clause. However, the terms of the houses; I do not ask the BDM from the brewers to lease dictated that the arbitrator’s role was to give me the telephone numbers, I go and knock on establish open market value. the door and chat to them. There is nothing to stop people doing that. Q97 Mr Hoyle: It is very lucky that you are a chartered surveyor as well, otherwise this could not Q93 Mr Wright: A lot of the tenants could not aVord have been done. to employ their own chartered surveyor. Mr Clarke: I would love to say that it was down to Mr Willis: No, and this is exactly the reason why the me but there were a number of very, very pubcos were asked to look at codes of practice. To knowledgeable people who helped me. put the record straight, I have acted for tenants and I have been given the breakdowns early on. I agree Q98 Mr Hoyle: It is good that you had the access to with Simon that the number of comparables that are that knowledge and that is why the poor old provided at the early stages perhaps could be landlord cannot take on the pubcos. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 15

18 November 2008 Mr Martin Willis, Mr David Morgan and Mr Simon Clarke

Mr Clarke: They would not risk it. At the end of the Essentially the investment value of the property day we won our arbitration and it still cost us half the would be maintained to a degree in that the rent sold arbitrator’s fee and our own. to another to another individual could remain upward only. Q99 Chairman: You are dealing with amateurs here; Mr Morgan: That also leads into the reality of the we often slip into the wrong language. Landlords market place. Enterprise Inns have been extremely and tenants we do understand the diVerence helpful in that if asked they will honour downward straightaway. We know what you mean but you will rent reviews in an arbitration situation. They do not have to work out what we mean when we know what oVer it, but if asked they will honour if. Punch we say what we mean. I think I know what I meant Taverns however are slightly diVerent. I have been just then. trying and trying to get formal confirmation that the Mr Willis: There is an anomaly that has been situation that I have, aiming headlong at arbitration, identified which is the situation of arbitration and that they will honour upwards and downwards rent the upward and downward only reviews. A number reviews. I have not had that confirmation. To of pubcos have built into their codes of practice that support Simon, I have asked in simplicity—because regardless of whether it was an old lease which had it is the easiest thing in the world—to have a specific an upward only review they will waive that right. As deed of variation in every single lease. Not a chance. Simon quite rightly said, the role of an arbitrator Specifically because, as Simon said, if there is no which is a quasi legal role actually requires the deed of variation and the freehold is subsequently arbitrator to be given instructions at the outset to sold the purchaser then has an upwards only rent say that if the rent was to go below the rent passing it review clause in that lease. The other thing, just to would be accepted. Essentially the upward only rent end on, the arbitrator can only actually make a reviews are in certainly the older leases and there is decision on the terms and conditions in that lease. If an anomaly there. it has not been confirmed formally that the pubco concerned will honour a downwards rent review he Q100 Mr Hoyle: Mr Willis, can you just help me? has not any choice; he has to be bound under the Who are you representing today/ terms of the lease which is upwards only. Mr Willis: I am Chairman of the Trade Related Valuation Group of the Royal Institution of Q106 Mr Hoyle: With the economic climate as it is, Chartered Surveyor. do you believe the pubco will actually look for more downward rents? Q101 Mr Hoyle: You are a bit of a gamekeeper and Mr Morgan: This is only on anecdotal evidence from a poacher at the same time, are you not? several of the BRMs who I suppose you could call Mr Willis: I work for landlords and tenants in my some of the whistleblowers but they have been practising business. confirming that in their respective areas that over 60% to 70% of their pubs are asking for downwards Q102 Mr Hoyle: In fact you are managing director rent reviews. It is as bad as that. of one of the biggest companies. Mr Willis: That is correct. Q107 Mr Hoyle: Do you think the pubcos will come up with a new wheeze to get money in a diVerent Q103 Mr Hoyle: So you sit on both sides of the fence. way? Do you not think you should declare an interest? Do Mr Morgan: I would love to be able to read their you not think you ought to resign, because your minds but I cannot. predecessor did? Mr Willis: No. I am an independent chartered Q108 Mr Hoyle: Past evidence shows that they can. surveyor and I work for landlords and tenants. I do Mr Morgan: Well, I would like to think so, yes. not understand what you are getting at. Q109 Chairman: BRMs and BDMs are the same, Q104 Mr Hoyle: You actually represent Enterprise are they? Inns, do you not? Mr Morgan: They are just the same thing, yes. Mr Willis: I think we represent just about every pubco and an awful lot of tenants as well. Q110 Mr Hoyle: Do reviews take account of whether improvements to the building have been made at the Q105 Mr Hoyle: I am not sure whether you are tenant’s expense? gamekeeper or poacher today. Anyhow, not to Mr Morgan: We have a situation where it is very rare worry. Mr Clarke, did you have something else to that it is explained that if you alter structurally, at add? the tenant’s expense, with the tacit authorisation of Mr Clarke: As Mr Willis rightly said, the big pubcos the landlord (because you have to have it completely have actually accepted in their code of conduct that written down), we have a situation of a large number the upward only rent review clause will be ignored of improvements that are structural works at the but still exists. The point that I am really making is tenant’s expense which actually should be that the upward only rent review clause still exists in disregarded, but because of the absence of estates the leases so if, for example, Enterprise Inns were to departments now of the size that they used to be sell my pub to a smaller landlord they would not be within the brewery companies (I trained under the bound by the upward only rent review clause. Courage regime so I was in an estates department) Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 16 Business and Enterprise Committee: Evidence

18 November 2008 Mr Martin Willis, Mr David Morgan and Mr Simon Clarke hardly anybody is informed as they should be that valuers do when considering improvements is look they should have a specific licence of alteration at what would have been had the improvements to which specifies those works which should be actually the public house not been carried out on the basis disregarded. We have had to go over and over again that then there is the opportunity to improve it, and for retrospective grants as it was never explained; it you look at what the public house is doing with the was conveniently forgotten. improvements and you make allowance to the tenant for the cost of building those improvements. Q111 Mr Hoyle: We have had quite a lot of You look at the two valuations and that is often Y submissions for tenants who are unhappy at having quite a di cult role depending on the extent of the invested in renovations in the pub and having improvements. worked very hard to increase their trade, their rent has just gone up. If the rent is just linked to fair Q114 Mr Hoyle: Mr Morgan, I think you want to maintainable trade and there is no wet rent as challenge that. suggested, will this not make the rent increase even Mr Morgan: It is an item which is of considerable greater? How can this be prevented? contention in that there is no lease clause that I have Mr Morgan: It is allowable in theory under the rent ever seen that says you should take the cost of those review aspect which says that the tenant’s good will works; it is the eVect of those works. That is open to should be ignored. In the reality it is not. It is as interpretation and if you are the landlord and you simple as that. want to be helpful to one’s own cause you sometimes Mr Clarke: One thing is that the improvements are would actually take just the cost rather than the disregarded at rent review, assuming they are eVect. The eVect actually can be quite spectacular for licensed improvements. Tenants’ invested money, small structural works; it can get to double the trade. with the landlord’s consent in writing, everything is However the cost itself then might be minimal so if rosy in the world, that would be disregarded. it goes and suits the landlord then they would take However, in the situation of the tied tenant if he does the cost because that is the smallest element of the 200 barrels, he invests money, he improves the eVect. If, however, there is an excessive cost then the property, therefore ends up doing 400 barrels, come landlord will ignore the excessive cost and just take the commercial valuation or RICS valuation that the eVect. It is a completely moving cycle. would be disregarded so he would still be doing 200 barrels in a hypothetical sense, he would actually be doing 400 barrels and missing out on the discount of Q115 Mr Weir: Our predecessor committee noted that, so he would pay an increase on his wet rent. that the cost of going to arbitration and court is That would not be disregarded so that would expensive for many tenants. Simon made that very actually be taken into account. He would end up point. Can I ask you how you feel that disagreements paying, despite the fact that nothing else has on rental valuations and rent reviews should best be changed other than he has increased his barrelage, dealt with? you should be imaging that the situation is as it was Mr Morgan: I would like to see a tribunal system before the investment, he would still end up paying which has the three standard disciplines in it, law, more because he would be losing more discount. accountancy and also surveying. The snag with that, as you so rightly say, is actually the cost. The avenue Q112 Mr Hoyle: It definitely is a double-headed which might solve it is if it were in some way coin. government sponsored, that the expense of that Mr Morgan: It is an area that ought to be explained, tribunal somehow was met from central government that if you are doing ordinary redecoration and the funds and the representatives had then to pay for standard sort of tenantable repairs that is not an their own representatives if indeed they had any. So item which should be ordinarily excluded specifically the individual licensee could still get to represent because you have a repairing obligation which himself at zero cost but if he chose to have other means you should maintain the pub both inside and people to represent him—an accountant, a lawyer or out. There has to be the diVerentiation there just chartered surveyor—it would be at his expense. But between standard works as against structural works the tribunal itself, if it were separately funded, would of improvements that are specifically disregarded. not then be the cause of such strife as you have with The standard works and redecoration etc ordinarily arbitrations when there are a large number of are not. instances where arbitrators are now charging over £350 an hour. You can have the situation of just getting to set it all up, having a read of the lease, Q113 Chairman: Mr Willis, would you like to holding an early meeting. You have then burned up comment on that? £3000 worth of time and you have not really got Mr Willis: Essentially it comes back to the definition anywhere and that is just the arbitrator. of fair maintainable turnover. Fair maintainable turnover disregards any specific goodwill of the actual operator. It also assumes the property Q116 Mr Weir: The same argument is made about properly maintained and decorated so outstanding industrial tribunals. What has happened in practice decoration et cetera. You assume it meets the terms is that the employer, if it is a big firm, tends to have a of the lease covenants. Improvements is a very hotshot lawyer there and the person applying to the complicated and major part of law under the tribunal represents themselves or cannot get legal Landlord and Tenant Act. Essentially pretty well all aid or whatever, so there is still an imbalance there. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 17

18 November 2008 Mr Martin Willis, Mr David Morgan and Mr Simon Clarke

Is there any system that will balance the playing field snag you have is that the recommendations of the if you like? It seems to me whether a tribunal, a court TISC in 2004, of which there were six main ones, or an arbitration the power is all with the pubco. have not been incorporated into the RICS valuer’s Mr Willis: There is a move afoot at the moment guideline. As a result there is no obligation to have through the British Institute of Inn Keeping to try to to follow them and they are not law. You have the institute a fast track independent expert referral situation that you have got the guidelines, they are method. This was trialled and operated by absolutely specific under the RICS valuation codes Inntrepreneur in the early 1990s and it has to be with but they do not include the TISC 2004 standard the agreement of both parties. The aim of it is to cut regulations. down the costs so there is a fixed cost and each party Mr Clarke: I have to say, contrary to my friends is limited to the size of the submission they can put here, whilst the RICS does have a system whereby forward. It was successfully used. There were some the arbitrator would have to disclose any interests in problems with it in the sense that one or two people our particular arbitration, the arbitrator neglected decided to go beyond the ten pages and put a lot of to do that. As a result I objected to the RICS dispute appendices in. It is currently under review by two resolution service. It transpires that the interest was independent chartered surveyors and they have been one that occurred after his instruction, so I am told. in contact with the RICS dispute resolution service He did apologise for it and has had a slap on the because the aim is to put together a panel of experts wrist as a result. However, I do not necessarily think who would be prepared to work on this fixed cost that that is all that encouraging for the tenants. You basis. The idea is that there is a limit to the size of the were asking how maybe some landlords might submission and the number of comparables to put simply work just for the pubcos, most of the big in. This is a way of trying to reduce the costs. The firms will do a considerable amount of work for the simple answer to your question is how would we like pubcos. Whilst Mr Willis will say, for example, he to see the rent settled? The obvious thing is amicably does work for the tenants and the landlords, when he but in the event of dispute this is what is happening says the tenants the chances are the tenant is going at the moment to try to find some way of reducing to be a one-man band. When he says the pubcos, the these costs. chances are, for example, I think I am right in saying, 18 of the 68 pubs available for new lettings at the Q117 Mr Weir: Mr Hoyle raised earlier the problem moment are actually Enterprise, so that is about 20% that has been brought up by several witnesses and of his new lettings. So long as those things are the suggestion that chartered surveyors and others disclosed at the outset I do not really see a problem involved in others are too close to the pubcos, to put with it because the parties are in a position to object it in a nutshell. Do you think it is appropriate for the or not to the appointment of a surveyor concerned. RICS and BBPA to act between pubcos and tenants when they themselves are connected to pubcos? Is Q119 Mr Weir: Mr Willis mentioned the idea of the there not a conflict of interest in this? single arbitrator but do any of you have any idea of Mr Willis: As chartered surveyors there are some how to reduce the cost of rent review to the tenant so that work almost entirely for tenants; there are some it is aVordable? You have mentioned that even in a who work almost entirely for landlords; there are successful arbitration it does seem the cards are very others who will work on both sides of the fence. The much stacked against the tenant and the reality is issue is whether there is a direct conflict in the role very few will have the resources, especially if the rent that that chartered surveyor is taking on in which is already weighing them down, to be able to take it case he would be in breach of the RICS rules of to an eVective arbitration to have the rent reduced. conduct would be essentially having dealt with that public house or have direct knowledge of that public Mr Clarke: You are quite right, it is massively house within the last three to four years. Arbitrators stacked against the tenant. They probably do not are specifically asked when being requested to accept have the financial resources to risk it. To put it in an appointment to declare any nearby dealings or simple terms, if I said to you that your rent is any dealings with those properties. As far as £50,000, you would think to yourself, “I think it arbitrators are concerned they have a duty and of should be £48,000” and the landlord says he wants course it is a legal process. It is down to individual £2000 more, we are talking about over a period of surveyors as to whether they choose to work for or five years a £10,000 increase. The alternative is that against and what their clients believe of their skills. we go to arbitration and you risk potentially £50,000 which is a year’s rent. The chances are that you are going to chuck in the towel or hopefully negotiate a Q118 Mr Weir: If a surveyor, for example, has a nominal decrease from that suggested, but you will huge amount of business coming from pubcos then not be getting the £48,000. Y that will make it more di cult, shall we say, for them Mr Morgan: I concur completely. The pro bono to deal with the tenants in mediation or arbitration. work that I undertake on behalf of the Licensed Do you accept that that is a problem? Trade Charity all of them are in the position they are Mr Morgan: I think that Martin said that if you have in because they cannot aVord to fight it. Every the situation of an individual who has specific work single one. from one of the parties involved in a dispute they will declare it. That is under the RICS regulations. The RICS have a specific format of regulations called a Q120 Mr Weir: Is there any organisation that can red book which has loads of things in it. The only give help to tenants to fight cases like this? Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 18 Business and Enterprise Committee: Evidence

18 November 2008 Mr Martin Willis, Mr David Morgan and Mr Simon Clarke

Mr Morgan: There is no such organisation that same amount as the existing commercial rent plus exists. I seem to be at the sharp end of a lot of the pro the wet rent. It would be left to market forces to bono work, I must admit, because I will always take establish it. It would be easier for the valuer anyway phone calls. It is singularly distressing. I must admit because everything is on a level playing field. One I am a fairly positive person but at the end of a tenant is very much easier to compare to another working day I can get thoroughly depressed having tenant; one pub is easier to compare to another pub had licensees who are in fact crying their eyes out. It because the tie arrangement is one element of the does tend to get to you little bit. lease, it is not diVerent. The machine tie is again grossly unfair to the tenant. I do not really know Q121 Mr Binley: Might I ask, did the OVA used to why that many tenants bother with a machine at all, do this work eVectively or am I looking to a golden we do not; we would rather have the bums on seats age that did not exist? as they say. That is about it I think in terms of the Mr Willis: There was help. I do not think there was immediately obvious. I am sure there are many that a situation where a tenant was given direct support. could be reworded that would reduce the amount of There are a number of licensed property valuers who conflict between landlord and tenant. will guide a tenant as to the process but I do not Mr Morgan: I concur with that as well. believe even in the pre-MMC days. We had probably a closer relationship with tenants and people helping Q123 Chairman: If the valuation approach used by each other, but I am not aware in those days of the RICS is working so well then I do not understand anyone actually taking on rent reviews. why the kinds of problems we have heard today are Mr Morgan: In those days it was a completely being described. I do not understand why Enterprise diVerent sort of regime. It was rather benevolent, it rent per barrel has gone up by 11% and Punch by 4% was the fact that you should and you did know the since 2002. Profitability is nowhere. Also I am people you were working for and with. As an estates concerned about the Morgan Stanley report which manager for Courage Western I had something like said that the 20% to 30% of tied pubs are 350 pubs and I reckon I knew probably 90% of them uneconomic due to high rents. There are some facts by name. I used to drop in and have a chat and the there that really are rather disturbing. rest of the bits and pieces. It was a wholly diVerent Mr Willis: I do not think anybody is arguing with the culture. profits method of valuation. One of the factors that Mr Binley: I was Courage Central and I had 154 the new leases bring in is the quinquennial rent pubs. reviews or the three yearly rent reviews and there is also this issue of the RPI annual increase. Essentially the problems that are in the industry at the moment Q122 Mr Weir: Do you think there are any terms are largely down to the recession which is aVecting frequently found in leases which are so unreasonable every other form of commercial property and that they should be deemed unenforceable by the particularly small businesses. Any business, even a courts? small shop, may well have a five yearly rent review Mr Morgan: I think there should be clarity over the that could have been agreed when we had boom disregard of structural works. Rather than saying periods and of course trade has dropped oV and V “the e ect of” (because that causes huge amounts of there has been competition from the major retailers. strife) it ought to say “not the cost”. It would be so It is aVecting all small businesses and I believe simple. It would be three words but it would clarify anybody faced with rent review increases at the the matter beyond any doubt. Secondly there should moment is having to look at them very closely. It not be upwards only rent reviews. Thirdly, there depends whether the pub companies and brewers are should be the absolute insistence upon transparency actually pushing for substantial increases at the in the rent review negotiation. That is quite easy to moment or indeed reducing them. We read in the insert; all it has to say is that you would follow press that several of the pub companies have actually national accountancy standards. It is an easy thing ploughed several millions of pounds back to just to put in there. It is all down to clarity and licensees. I do not know the detail of that; that as is aiming to take away the areas of adversarial conflict. press comment. Certainly I think the recession and Mr Clarke: In addition to Mr Morgan’s ideas, I the current economic situation over the last 15 think the inflationary increases are grossly unfair on months is causing all sorts of problems tenants. In a situation where we have a decline in turnover I think it is totally out of order that the rent Q124 Chairman: Do either of you gentlemen want to is still going up every year. It is just expanding an add anything before we draw things to a conclusion? existing problem that goes on and on and gets a Mr Morgan: I think that is enough. bigger and bigger and deeper spiral for the tenant. Chairman: Thank you very much indeed for your The tie itself I think we are pretty well all agreed that time and trouble. We are very grateful to you for we want to see the back of that. Whilst there will be your evidence. We will proceed with our next session a comment that rents will go up if you are made free in December and hear from the other side. Thank of tie, the diVerence is that they will not go up by the you very much indeed. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business & Enterprise Committee: Evidence Ev 19

Tuesday 9 December 2008

Members present:

Peter LuV, in the Chair

Mr Adrian Bailey Miss Julie Kirkbride Roger Berry Anne MoVat Mr Brian Binley Mr Mark Oaten Mr Michael Clapham Mr Anthony Wright Mr Lindsay Hoyle

Witnesses: Mr Rob Hayward, Chief Executive, British Beer and Pub Association, Mr Nick Bish, Chief Executive, Association of Licensed Multiple Retailers, and Mr John McNamara, Chief Executive, BII, gave evidence.

Q125 Chairman: Gentlemen, welcome to this second Mr Hayward: No, we do not. The British Beer and session of the Committee’s inquiry into pubcos. I Pub Association represents really I suppose three always begin by asking witnesses to introduce diVerent sections of the industry: one is companies themselves but today my question has a bit more that are pure brewers, people like Carlsberg, which point than normal because I am genuinely not quite as the committee will know only too well own sure what your organisations do. Let us take you one Scottish and Newcastle; secondly, pub companies, at a time, if I may, and start with Nick Bish from the those companies that are set up specifically to Association of Licensed Multiple Retailers. Could operate estates with varying structures; and then you explain who you are? Explain to me why pubcos also we do have an overlap here of what we generally are no longer retail members of your organisation term family brewers and that would be regional and whether this means that you no longer brewers, the likes of Fuller’s, Wells and Young’s, et represent pubcos. cetera, and also significantly people like Marston’s Mr Bish: I will gladly do that and I am glad to be and Greene King. All those companies will have not here, and thank you, Chairman and the committee. only a brewing side but managed houses, to which ALMR, the Association of Licensed Multiple Nick Bish has already referred, and also leased Retailers, was formed 15 years ago at the bottom of estates of varying sizes, from somewhere 2,000 the last bad time of recession we had but properties downwards. immediately and more importantly post the Beer Orders when the nature of the industry changed Q128 Chairman: Finally,Mr McNamara, that leaves dramatically. We characterise ourselves as the only you as the professional body for the individuals, as national trade body solely dedicated to representing I understand it. That is what distinguishes you from the interests of multiple and bar operators and, the BBPA. uniquely amongst other trade bodies, we do not Mr McNamara: The BII, formerly the British represent any landlord interests, and certainly do not Institute of Innkeeping, was formed in 1981. Its articulate them. We do feel that we have a national main remit is to raise standards to help people be role in promoting ‘the pub’ and licensed retail, and more professional. We do that by delivering in that can be compared with others, but we do not qualifications through our awarding body and we represent landlords. We do have national companies also do that by providing all members with support within membership but two-thirds of our members services, information, guidance and support. We are derived from small independent companies publish a monthly business magazine which is full of operating 50 or fewer pubs, bars, restaurants under business-building ideas. Our sole remit is to their own branding, so small owned companies. professionalise and to help people in their enterprise, in their business. As you say, we do have individual members from across the whole spectrum, both Q126 Chairman: That is on a fully managed basis? front-line operators and people who work for Mr Bish: Those are on a fully managed basis. Of our corporates as well. We are fairly uniquely placed in total of 91, the rest might be mixed; some totally the industry with representation from all sides. leased or tenanted, but our total membership owns or operates 15,500 pubs and bars, which is about a quarter of the national pub estate. Looking at the Q129 Chairman: So the only one of the three that managed estates, we believe that we represent about receives direct funding by membership fees from half of the managed pubs and bars and through them pubcos is the BBPA? of course the employment that they represent is Mr Bish: We do receive funding. After the last about 125,000 employees—so managed and small. committee, the nature of the relationship between ALMR and certainly Punch and Enterprise changed and they became what we call a supplier associate Q127 Chairman: That helps a lot. We turn to Mr because in addition to our partner pub companies, Hayward. The BBPA is a very grand title but of we have an associate membership category of course you do not actually represent individual brewers and lawyers and professional people who tenants, do you? keep our industry turning over, as it were. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 20 Business & Enterprise Committee: Evidence

9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara

Mr McNamara: Membership subscriptions come Mr McNamara: You may very well think that. from individuals. We do have support from members Chairman: I am sorry to labour these points but it is as well, about 50 of those across the board; we have very important to understand exactly where the 15,000 individual front-line members, most of those three of you are coming from. That was helpful. running their own enterprises and some now just not from bars, but from restaurants and hotels as well. We have on top of that 30,000 or so provisional Q137 Miss Kirkbride: Could any of you comment on members, people who have taken their first whether you think the code of practice is working professional exam coming in to the industry. We well. We will start with Mr Hayward? hope that as they develop their careers they will Mr Hayward: I think it is working reasonably well. become full members. About 25% of our income is Following the last review in 2004, we instituted a from membership and 75% is from awarding; we are series of changes to our own code, which we have a national awarding body delivering qualifications identified in our evidence. We have identified those from level 1 to level 4. parts where we made changes and those parts where we did not. What has arisen, as I think the Q130 Chairman: There is no money coming from questioning indicated, is that we have the overall pubcos, as far as you are concerned? code in terms of its operation and we then leave it to Mr McNamara: Some pub companies sponsor individual companies to make their adjustments to tenants and lessees as they come into the industry for their specific processes in terms of their actual their first year’s membership and they give them agreements with these leased tenants in one form either full subscription payments or they pay half the or another. subscription, depending on the agreement between Mr Bish: ALMR would say that the pubco model them. does not work well and is not working very well at the moment, and particularly because it operates in Q131 Mr Binley: Can I clarify this? Is there nobody a declining market. It was invented about 15 to 18 coming from pubcos at all for training and years ago and since then there has been mostly a bull development? market of increasing property values and increasing Mr McNamara: Each pub company has its own prosperity in the nation. Recently, we have seen a policy.Some pub companies obviously run their own decline. The way that the pubco model works is training departments. divided between those. You will be aware that in a rental system, the so-called dry rent, money changes hands, and incomes to pubcos is based on the beer Q132 Mr Binley: I understand that but is there that they sell and tied to their lessees. In a declining anybody coming to you from pubcos for training market the income that they get from beer declines and development? Y Mr McNamara: If they do our qualifications, and and the tenant will find it more di cult to sustain the many of them do, we charge a processing fee for dry rent because their income is also declining as those qualifications, and that would come through business is going down, with the result that the in the normal course of an entry for an examination. lessee, the tenant, is squeezed. I am not saying entirely that the pubco does not share the pain, because obviously they are losing income on their Q133 Mr Binley: I am finding it rather diYcult to get beer, but, to answer your question, it is not working an answer to my question, Mr McNamara. Do the because in a declining market rents and agreements pubcos pay you directly for training and are based on a five-year period and this seems not development of any kind? Mr McNamara: We are an awarding body, so we are flexible enough to cope with, as we are all observing, not a training provider, Chair. We do not actually a steep, some would say potentially catastrophic, oVer trainers out in the field. We operate through 500 decline in the economy. examination centres, some of which are FE colleges, some are companies that have trading partners. If Q138 Miss Kirkbride: Does Mr McNamara agree they take one of our qualifications, we charge a with Mr Bish? processing fee for that qualification, just as City and Mr McNamara: I guess our membership is split; Guilds would or Edexcel, for example. about 35% of our members are freehold, so they do not have the issue. As a professional body, we clearly Q134 Mr Binley: I note you have not answered my are in business to support, help and guide in any way questions on three occasions. we possibly can people to survive in business. There Mr McNamara: I am trying, I am sorry. are loads of factors, not just the fact that businesses are under pressure and part of that pressure is the Q135 Mr Binley: Do they pay you directly for any fact that they have to pay rent every month. They are training or development activities? also under enormous pressure from outside factors, Mr McNamara: The answer is no. I am sorry; I including taxation, smoking bans, regulation and thought you were talking about qualifications. extra burdens on them as any small business is going through. As a professional body, we stand there Q136 Mr Hoyle: We can take it that Mr McNamara trying to equip people to survive in a very is the good guy and are the other two the bad guys? challenging environment. Paying rent is one aspect Is that the easiest way of saying it? of that. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business & Enterprise Committee: Evidence Ev 21

9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara

Mr Hayward: May I come back because I think I research is the closures versus openings because the misheard Julie Kirkbride’s question? Was it in total figure is what we are addressing, but actually relation to pubcos or codes? I thought she was the rate of closure, certainly up to September of this referring to the code when I gave the answer. year, was lower than the equivalent period last year, if you like, gross closures. What we find has fallen oV V Q139 Miss Kirkbride: The code, yes. the cli is openings. Openings in the year to Mr Hayward: You said ‘the code’ as against the September 2008 were 403 (CGA figures again); the pubco itself. One or other of us clearly misheard the equivalent period up to December the previous year, question. but also 12 months, was 1,035 openings. This is not Mr Bish: I heard ‘pubcos’ just a pubco issue; this is a banks’ issue. The banks shut up shop about a year ago and to get into the business became much more arduous. The net Q140 Miss Kirkbride: Could you respond then? closures have accelerated hideously; the closures Mr Hayward: If I could respond in relation to have continued but the lack of openings has meant pubcos, as far as we are concerned, there is a vast that the net figure is much worse. That is important number of diVerent forms of pubco and therefore it to note because there are other opportunities or is not easy to make the observation that one system does or does not work. As you will hear later, you other targets, other bad boys out there, as it were. have two of the major pubcos here but in fact they operate in a number of diVerent ways, as do the Q142 Miss Kirkbride: What about beer sales? On- other companies. I have already referred to some of licence beer sales have fallen much faster than oV- the smaller companies and these tenanted estates. licence beer sales. I know the accusation is that it is Each one of those operates in a very diVerent way in because of these wicked pubcos not passing on the terms of relationships with their leaseholders or discounts to their tenants. tenants. Mr Hayward: Beer sales have been in decline for several years. Alcohol sales as a whole are now in Q141 Miss Kirkbride: What are the figures on the decline. In terms of beer sales, the rate of decline has failure rate of pubco tenants between 2008 and 2004? been the highest in the on-trade as against the oV- Mr Hayward: We were asked by your clerk to trade. That is not specifically to do with the question provide some figures. The figures are diYcult to of the leased tenanted estate; there is a whole series pursue to be precise. Some of you will know that I of developments. I have been doing this job for ten have an obsessive interest in certain forms of years and this followed this pattern in terms of a statistics and I therefore provided figures back with decline in the oV-trade as against on-trade certain elements of caveats because the further you throughout that period and significantly it coincides break them down, the less reliable they are. Clearly with ever greater aggression in terms of the first important thing to make reference to is the supermarkets; they are discounting to an extent fact that the rate of failure amongst pubs is which all pubs actually find incredibly diYcult to accelerating rapidly; if that is clear over the last three beat against. Some of your parliamentary colleagues or four years, and one would expect in the have identified the insane and some might argue forthcoming year, given everything that is going on, unacceptable level of discounting to drive footfall that that is the case, significantly within the whole through supermarkets. I think that the gap between hospitality industry—restaurants, hotels, et cetera— the on-trade, in whatever form—managed house, there is a high rate of failure but they are also finding free trade or lease-tenanted estates—and the that it is fading more rapidly. Specifically in relation supermarkets has grown progressively. There have to the nature of the three diVerent estates—lease been other factors as well of course which the tenancy, free and managed—the figures we have industry is facing, and again it is across the board. provided showed that the free trade had the fastest One should not underestimate it; things like smoking rate of closure. I have submitted those figures with regulations, which had a dramatic eVect on the pub caveats but as far as we are concerned both sets of trade whatever you were talking about. I had figures we have taken over the last year have come discussions with Ted Tuppen, who is giving evidence out with the free trade having the highest rate of later on, and with Caroline Flint in relation to the closure. Those are not our figures; we had them from impact of the smoking ban. We indicated that we the CGA, as we identified in our response, which is thought at that stage—this was two years before the an independent research organisation that supplies actual implementation of that—that we would lots of evidence to the trade. Broadly, that is the probably lose about 5,000 (ie. 10%) of the total estate evidence that we have but to be even more specific it as a result of that smoking ban. I think everything becomes more risky to break them down. has gone to show that it has probably accelerated Mr Bish: To add to that on the closures, I would that process. There is a number of factors that aVect welcome the chance to say something on codes, the variation between the on-trade and the oV-trade having heard now properly. We also looked at the sales; it is not any one particular factor. CGA figures and, yes, we interpret them as being about 39% to 40% of the closures in the pubcos or the tenanted leased estate and, as Rob Hayward has Q143 Mr Binley: I had the great privilege and said, the slight majority in the independent free pleasure of working in the pub trade as a DM for a estate. It is diYcult to point a finger and just say that long time, a long time ago. I know there is a it must be them, as it were. Our interesting part of the diVerence between closures of pub businesses and Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 22 Business & Enterprise Committee: Evidence

9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara failures of pub businesses. You have not really given had too many pubs anyway, probably around 5,000 us any direct figures on failures of pub businesses. too many pubs, and what we are seeing is an Do you have any? adjustment to get us down to what the market needs Mr Hayward: We do not. We try to diVerentiate in terms of the number of pubs? between one sort of closure and another, and you are Mr Bish: I would say that I, like Rob Hayward, have absolutely right; Nick Bish made reference to the been in this end of the business for 10 to 15 years now diVerence between closure and failure. In trying to and I have been hearing that there are 10,000 too nail down the accuracy of any one set of figures is many pubs and the market is going to adjust. In the very diYcult. We do not have anything specifically bull market, which we have experienced over most of about failures. The people who have the most precise the last period, there is always somebody who makes details will be the diVerent operators of pubs, the decision that they want to go into a pub—it is a whether they are small brewers or large pub lifestyle choice—and they can make the diVerence; businesses. they are local or they have some special way of doing Mr Bish: No, we do not have that. I would say it. When it declines, the chickens come home; the obviously that our members are quite good and tend business chickens come home to roost in a big way not to fail on a pub-by-pub basis, but, yes, pubs and I fear that that adjustment is going to happen within our members’ estates do fail; they get, as it this time. To answer your question, yes, you are were, moved on to another operator who can probably right, but who is to choose? It is the perhaps make more of a success of it. Occasionally customer who ultimately chooses as to whether they whole companies fail, but the estate will be moved want a pub in their neighbourhood and will through the administrators or the receivers into patronise it and whether the quality of the people other hands. I am afraid that the figures that I have running it can make a success of the business. oVered you were those where the business is no longer operating as a pub. Within that is a cycle of Q147 Mr Oaten: I am right in that there could just unhappiness and business problems to which you are be too many pubs? quite right to refer. Mr Bish: There could be too many pubs. Mr Hayward: I think it is fair comment. If there were Q144 Mr Binley: I wonder if Mr McNamara might too many pubs, as Nick says, given changing comment on this because you clearly track how good lifestyles when people are much more mobile, when you are at developing people in terms of many pub they choose to consume alcohol at home, then that businesses. Have you any figures in this respect, of probably adds to the original observation that you businesses failing? made about there being too many pubs; it probably Mr McNamara: We track the CGA papers; we look adds a further tier in relation to it. at those among others obviously and look at the Mr Bish: We should add of course that 36 a week overall figures. Bear in mind we are 15,000 front-line pyramids up, does it not, and we might well have members who are doing the job. There are many already started that process in quite a vigorous way. more pubs than that out there. We would love to What we are exploring here is the whys and is it a bad have 50,000 front-line members with every pub thing. Individually it is going to be a bad thing and represented as a member. What we do know is that we need to explore why it is happening and are there if you are a member of a professional body and you any remedies available? train people—you train yourself and your staV—the chances of your business success increase four-fold. Q148 Mr Clapham: Coming in on the code of We know that as a fact, especially if you go on to practice, Mr Bish, if we look at what happened the local free development, which is very high level and last time the Committee made its recommendations, very focused on running a business. All the in 2004, one of the emphases that we expressed was qualifications we do at level three have a dramatic the need to update that code of practice to cover a impact on the bottom line. We know that because we number of issues, particularly the rent issue, and yet have tracked it. I would argue that our membership we see that we have had a small survey done by the is the best of the best. Federation of Small Businesses who asked members, landlords, et cetera, and 99% of the 156 people who Q145 Mr Binley: I am sure you would. That is took part in that survey said that they did not feel salesmanship. that there had been any changes at all. Is it possible Mr Bish: It occurs to me, in answer to that last that all that you have done is pay lip service to the question, that the pubcos might well be able to give recommendations of the select committee of 2004? you a steer in the second evidence session because Mr Bish: I think it was Mr Hayward who made the they will know those on their estates that are having point about the codes. ALMR does not have a code special treatment, or have even got to the stage of as such. Perhaps I could make our comment after temporary tenancies where they are holding the Rob has had a chance to speak on the BBPA code property but the original lease has in some way or and John McNamara may have some comments. another failed. They would know those numbers. I Mr Hayward: I think the answer is emphatically do not. ‘no’. We identified in our evidence precisely what changes we had made. We wrote to one of chairmen Q146 Mr Oaten: On the level of closures, you can mid-term identifying the changes that we have made. talk about smoking rent levels, the economic We do not regard those as superficial; they are downturn, but is it not the case that actually we just substantial and they follow overwhelmingly the Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business & Enterprise Committee: Evidence Ev 23

9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara recommendations that were made by this Q149 Mr Hoyle: I think we have missed out the Committee in one form or another. We have reason why pubs do close. The truth of the matter is provided the outline. There is a process that has that they are squeezed out of business because of changed since, which John will touch on, and is in high rents. That leads us into part of the valuation. the process of changing as well. I think that is As the organisations, are you happy with the Royal important. What we are dealing with here is a Institution of Chartered Surveyors method of relationship between a business and another person valuation? Are there any problems? If you see any, who wants to set up in business. For example, we what are they? Shall we start with you, Mr have made it absolutely clear in our code that people McNamara? should and ought to take professional advice. People Mr McNamara: I guess the classic definition from do not enter into these sorts of agreements without the international standard is: a reasonably eYcient taking legal and financial advice. In our own code on operator. That definition is quite diYcult to hammer page 6 it makes absolutely clear that people should down. What is a reasonably eYcient operator? In take advice in one form or another. It is absolutely our terms, when you come into the industry as a clear that you should take independent advice. newcomer, we urge every individual: number one, to Mr McNamara: Can I make a point about the code? take some external advice; number two, to qualify Obviously if you look at the overall UK code of themselves before they start anything; and, number practice, our members and our national council had three, to keep qualifying themselves and keep a debate and discussion around how we could help themselves current. For example, anyone who has to clarify that relationship. Codes of practice have done what we call the introduction to the licensed been around for many years. What the national retail operations, ILRO, and that is a three-day council decided to do was to set up a not-for-profit programme provided by some pub companies and company called BII Benchmarking and other independent traders, is brought to a level of Accreditation Services, which looks at company competence which is beyond the legal statutory codes of practice and asks: does that code do what it requirement to have a licence, to do a licensing says on the tin? Is it clear, is it explicit, does it cover examination. That ILRO programme is the areas like what a tie is, does it cover areas of what minimum in terms of giving someone the equipment property is and training and signposting that the to start operating premises but they would need company does? Is it absolutely clear in that code of ongoing support, both from BDM and from— practice what you would expect in that business relationship? As you know, so far six companies Q150 Mr Hoyle: But do you agree with the Royal have put that code forward to us, to that Institution of Chartered Surveyors way of independent committee. We have accredited six and valuation? there are five or six more in the pipeline to come Mr McNamara: I think if the surrender calculation through. The accreditation scheme is dynamic. It is is based around assuming a reasonably eYcient also open to people to challenge us, to come back to operator, then I do. I am not qualified to comment us and say that that code of practice has not been on whether the valuation method produced by RICS observed and ask if we are going to do something is valid or not, to be honest. We try and help. about that. We have had a number of inquiries from members and non-members on that basis. Our first Q151 Mr Hoyle: Are you happy with how they do it? response is: have you gone through the normal You do not know? routes within the company to clarify that position? Mr McNamara: I am not qualified to comment. If they do not get any joy through that, through elevating it through an internal process, they come Q152 Mr Hoyle: So you do not see any problems; back to us and we go straight back to the company you have not heard of any. Mr Bish? and ask: has there been a breach; there appears to Mr Bish: We do not like it. We do not like, for the have been a breach; what will you do about that leased estate certainly, the way the historical method breach? of valuing a pub and the fair maintainable trade is Mr Bish: I want to come in on codes because we have arrived at. We believe it is slightly subjective; it is V adi erent point of view. My members operate on the certainly based on historical data and it certainly receiving end of leases and of codes. The code is very does not reflect the real costs of doing business that well; the BII have undoubtedly done a sterling job in my members are experiencing at the moment. So we improving the transparency of codes, but the code is find it a bit of an anachronism. It is built on the basis not the lease and the leases have not always changed of the tied estate of the old breweries transported to marry up with the code of practice. It is into the new model of the leased estate and it does administratively quite diYcult but nevertheless there not fit comfortably. We would rather see, and many are issues where for instance side letters or changes of my members of course have this, full commercial to a lease can be published quicker and more leases in the public market where it is based on publicly to the lease as opposed to the code because square footage and comparables and so on. I accept the code implies that the lessee should take action, entirely that a pub is a pub and you can turn a whereas the lease is what binds the courts when chemist into a shoe shop, so the high street is a way eventually a decision has to be made on a dispute. of doing things, but the pub is not suYciently The diVerence between the two is quite important. distinct, certainly for a long leased business, not to We are on the receiving end of leases which have not go down that route and I think in broad terms we matched up with the codes. would prefer it. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 24 Business & Enterprise Committee: Evidence

9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara

Q153 Mr Hoyle: Do you agree with Morgan Stanley Q157 Mr Hoyle: That is because basically you are who similarly reported that 20% to 30% of tied pubs representing the people that are reaping all the could be uneconomic due to the high rents? Do you money and therefore you would not want to think that is true? challenge the people who are paying? Is it fair to Mr Bish: Any business can be uneconomic due to say that? high rents. I have no figures. I could not agree or Mr Hayward: I think it is fair to say, Mr Hoyle, that disagree with that. if one looks at the share valuations in recent weeks, Mr Hayward: RICS provides professional services, and you have made reference to a particular City as John has said. I am not sure what other alternative company, you make your judgment about pub route you would follow. There are panels to which companies which presumes they are not reaping you might give consideration. There is another way those monies. of assessing the value of a pub and that is the rateable value. There is a specific system that Q158 Mr Hoyle: That is because of bad management operates for pubs and that operates on a national and over-borrowing. They have been caught on the basis through the valuation and it operates as an barbed wire and the fact is that now they have been agency under DCLG, so there is another set of taking their pound of flesh and the trouble is they valuations in eVect put on pubs, which I think, along have now been exposed for what they stand for. with other factors, any person who is taking up a Mr Hayward: I will leave you to ask questions of business or any pubco will actually choose to look individual companies. at. Q159 Mr Binley: Coming back to the BBPA’s submission, it was stated that rent will be reassessed Q154 Mr Hoyle: In the RICS guidance it implies that on the basis of the trading pattern of the pub and the valuation method should be fair to tied tenants, what could reasonably be expected of the business as even though it does not explicitly take account of the it exists. Can I quote you some figures I have from fact that a tied tenant may pay more, between 30- Punch Taverns primarily about relative incomes 50%, for the beer than a free trade competitor. between 2007 and 2008, recognising that leased firms Would you say that gives a disadvantage? I think it take about 11.5% of the sale take that managed pubs does but what do you think? do. Leased pubs take an average of £113,000 a year; Mr Hayward: The charge in relation to beer and the managed pubs take £800,000 a year. Yet in the relationship in terms of the tie has been looked at on diVerence on the year these figures suggest that sales any number of occasions by this House and other of leased pubs are up by 6% with a 5% increase in bodies as well. That is part of the process in terms of gross profit, whilst sales in managed pubs are up by setting what is in eVect the value of the property, 10% with a 20% drop in gross profit. That suggests whether it is the beer tie or the rent or the interlinking to me a set of figures that is totally meaningless and between them, and the other elements that on a tie. yet that is used to set the basis of rents in the way that They are the professionals and I cannot intrude on your submission stated. Are you concerned about that. I have been asked to do so on occasions and those figures, bearing in mind they are used in that would not. way? Mr Hayward: I will leave Punch to comment in relation to that. Q155 Mr Hoyle: But they do not take it into account, do they? What you are saying is that you Q160 Mr Binley: No, I would like you to do so as are assessed a very high rent by the Royal Institution well because you operate it. of Chartered Surveyors saying, “This is the rent that Mr Hayward: Those are their figures. In terms of the you should pay”, but then there is no oVset, is there, diVerence between the leased tenanted estate and the because if you are paying 30-50% more for your beer, managed house estate, there has been a marked it is just another way of screwing you into the transfer from managed houses through to lease ground, is it not? What do you think the average tenanted estates over the last decade. That is the lifestyle is of a pub tenant? reason the turnover in managed houses is so much Mr Hayward: I honestly do not know. Coming back bigger. to the RICS, you have had evidence from them; they answered your specific questions and they are in a far Q161 Mr Binley: I understand that in managed better position to comment in relation to the houses it is bigger because the pub companies keep processes, which they undertake and they undertake the best pubs. on behalf of companies as well as individuals, in the Mr Hayward: It is also because there is a regulatory same way perhaps as a lawyer for the prosecution or burden associated with employment in the line the defence. There is a variation in the process there, which makes it uneconomic to have managed houses but you have had the evidence from them. at a smaller level. The point at which you operate a managed house has risen ever higher in the last two decades. Q156 Mr Hoyle: So you have not taken a view? Mr Hayward: In terms of general processes, I would Q162 Mr Binley: But not in a year; this is a diVerence leave that professional judgment to the RICS. in a year, Mr Hayward. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business & Enterprise Committee: Evidence Ev 25

9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara

Mr Hayward: I was just going to conclude with the Q166 Mr Binley: Do you have any comments on that observation that it is in relation to the regulatory particular point? Do you understand the point that burden that is imposed. There is no question that the this gives a really bad impression of the way pubcos diYculties that are faced by this sector are very work with their tenants? substantial and they are faced by both the pub Mr Bish: Our experience is as I said earlier that I companies and the ordinary leased tenanted estates think my members are quite sophisticated as well. I can identify a whole series of actions which businessmen because they operate companies. They companies have taken but I will just refer to one, are exposed more frequently to this sort of thing which is relevant both to Punch and to Enterprise happening. The five-year rent review is not a five- and also to Marston’s whom you have not invited to year occasion; it is happening annually because it is give evidence but who submitted evidence and are across their estate. My members are aware of the well known certainly to a number of members of the recommendations from the last committee. They are Committee, and that is the big individual action also aware that the pubcos largely have said that which they took in relation to floods which was an they would disregard upward only rent reviews, immediate response and landlords are still facing notwithstanding that they remained in the lease. I problems in relation to that. Circumstances have think personally that they could have issued side changed very dramatically. One has to judge the sets letters to confirm that circumstance rather than it of figures because of those changes that have taken being the quality of the relationship. Therefore, my place. members are aware of that and my members tend, not all of them, to go back to their pubco and say, “I want to talk to you about my rent. I want it to go Q163 Mr Binley: Does anyone else wish to comment down. How can you help me? What are you doing on that because they do look terribly suspicious to about it?” This conversation does happen. So they me, quite frankly? Let me move on. You will know honour it but when prodded or pushed by their from the Fair Pint campaign and indeed others that lessee. That opportunity obviously is available upward only rent reviews are still relevant to 29% of universally.It is taken up by my members more often the pubs that have reviews. This is totally in defiance than not because, as I say, they are more of the recommendations made earlier in a number of sophisticated businessmen. Unfortunately, their ways. Can you tell us why this should be the case and experience is that the pubco will accept the can you say why upward only rent reviews should conversation and they might oVer a rent reduction, not be removed from all leases and should have been but usually my members’ experience is that this so already? comes attached with a number of conditions, like Mr Hayward: It is a legal process to which Nick introducing a retail price inflation clause into it so referred earlier on in relation to any element of an that the rent goes cranking upwards in spite of the agreement. They are being phased out, as a number theory of it having come downwards, and possibly of companies have referred to. Again I refer to there will be conditions to extend the nature of the Marston’s evidence which actually talks about the tie. Say it was only a beer tie, they might want to process of phasing those out. Upward only rent extend to a wine and spirit tie or a amusement reviews do not only apply to the pub industry. I gave machine tie, on the basis that they would say, “Well, evidence four years ago and I repeat the evidence. I we want to have a good view of the total business so as the BBPA have an upward only rent review built that we can be better placed to help you”. into my rental agreement. Who operates that upward only rent review? Who is my landlord? The Department of Health. Q167 Mr Binley: What you are telling me is that they pay lip service in cases of upward only rent reviews and they believe that but they will catch him in other Q164 Mr Binley: I accept that totally and I have ways? Is that what you are telling me? already been on a general commission which made Mr Bish: That is my members’ experience. that very point, but we are talking about the pub trade and pubcos’ relationship to this particular Q168 Mr Binley: That is surprising. Can you give requirement. They have not done it, have they? examples of a pub company with an upward only Mr Hayward: They are being phased out as a matter rent review in the lease where the rent has gone of process but changing a rental agreement requires down? You have said that has happened. You said costs. The fact is that within that process we now that it was in the lease but there were examples where have the economic inhibitions that we face and large rent had been reviewed downwards. Can you send numbers of locations are not only having freezes but me examples of that? they are actually having rent reductions as well. Mr Bish: Undoubtedly.

Q165 Mr Binley: I have evidence that suggests that Q169 Mr Binley: Good. We look forward to this is not a matter of the passing of time; it is a wilfil receiving them. I am most grateful. Can I ask requirement not to put in the leases the fact that whether it is normal or right for rents to be linked there could be downward rent reviews as well as to RPI? upward rent reviews. Is that a fair statement? Mr Hayward: In terms of agreements, Nick has Mr Hayward: In which case, you will have to take already identified that leased tenanted agreements that up with the specific landlords, whoever they are as varied almost as the number of pubs we have. may happen to be. There are a lot with RPI built in. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 26 Business & Enterprise Committee: Evidence

9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara

Q170 Mr Binley: You have already made the point Q174 Mr Binley: Perhaps you could answer my three that the pub trade is so diverse that the average is points there about: what percentage of rent reviews meaningless. RPI is an average. Are you still saying go to arbitration; what is the average cost of that that is the right way to look at an individual arbitration; and what percentage of arbitrations are business, because that is how rent reviews are found in favour of pubcos? applied? Mr Bish: I do not have that information. Mr Hayward: What I am saying is that there is a very Mr Hayward: I do not have that information either. wide range of agreements between one business and Mr McNamara: I do not have that information. another, as Nick has already identified. He is What I do know, and perhaps we all know, is that if representing primarily a diVerent sector of business. you go to an arbitration service you run a risk of What is right is the agreement between a company substantive costs and if you lose out, if you are at the and another business because both parties enter into wrong end of that arbitration, you pay the other that, presumably having taken their own side’s costs as well. What we try to do, at our professional advice. Whether that is RPI or whether members’ request again, is to come up with an it is in some other form, that is a decision of two independent expert determination service, which businesses coming together. would be a low cost, short term process. All our members have supported that and the road shows we Q171 Mr Binley: Let me put you in my position. have done recently on rent review negotiations have Would you advise that they should not use RPI as a all supported that. We are talking to some pub factor in defining rent increases? companies that will also hopefully become involved Mr Hayward: No, I would advise them to take their in that. legal and financial advice as we do and then take a Chairman: We want to look at some of the judgment. In current circumstances, all these alternatives later on. Deal with the arbitration issue matters are up for review. Evidence has been given at present. by diVerent companies indicating many of the Mr Binley: Can I suggest that you do not know but diVerent processes that are being undertaken, given you are able to find out and I think that information all the diYculties that are currently being faced. will be very important to us. All three of you might Mr Bish: As I said a moment ago, we see RPI as write to us so that we can get your individual views obviously inimical; it is not fair because it is based on and information in this respect. Is that fair, Mr the average and it tends to be introduced into a lease, Chairman? or has been in high inflationary times, and is still Chairman: Providing information is certainly fair. there. We do not like it. If you have a downward rent We will have a conversation about this. Thank you. review, we see it as a device to compensate for the expression of help that turns out to be not quite so Q175 Roger Berry: Mr Binley asked for examples helpful as we thought in the first place, and so we where upward only rent review clauses had not been would be against it. enforced and the rents had actually come down. I am more interested in how often that happens, what Q172 Mr Binley: I am most grateful. Mr proportion of pubco rent review clauses are cast McNamara, can you comment on that? aside in favour of rents coming down, and of those, Mr McNamara: We obviously have some members what proportion attach new strings and what who contact us. We oVer a free legal help line for proportion do not? I think those proportions are far example. We have about 2,200 calls on that help line more significant. Name me a few examples. in a half year. In the half year to October, 203 of Mr Bish: I made the point, so perhaps I could answer those were around Landlord and Tenant Act first. It is very low and I would also say it is not relationships. There will be within that data some scientific in the sense that what I have told you is matters around rent negotiation, rent disputes— anecdotal. It is repeated frequently but not in any what is arbitration and how does that work? We do scientific research way. Again, we could explore that. get into some of those arbitration discussions. It is mainly in a broad sense around, “Can you help me Q176 Roger Berry: If you have the figures, the to arbitration?” rather than “Can you justify this Committee would be grateful. If you have not— or not?” Mr Bish: We have not got them today.

Q173 Mr Binley: My final question is about Q177 Mr Oaten: Mr Hayward said “a large arbitration. Can you tell me what percentage of rent number”. reviews go to arbitration; what is the average cost of Mr Hayward: I do not think I used the phrase “a that arbitration; what percentage of arbitrations are large number”. I certainly indicated the number is found in favour of pubcos; and who represents those growing but I was going to make the comment to tenants who are not the clever ones who join your Roger Berry that in relation to it if one took the most organisation, Mr Bish, but are the ordinary guys like recent time period, and this comes back to my desire me who do not bother? Who represents and helps to be accurate for the Committee, the figure would them? It used to be the LVA big time. Are they still be largest. Because of the serious economic around in that respect? circumstances we face, all companies of whatever Mr Bish: The Federation of Licensed Victuallers size are providing more and more assistance in terms Association and some small LVAs exist. We do not not only of rent concessions but a whole raft of other represent individual licensees or individual lessees. forms of financial assistance as well, which again are Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business & Enterprise Committee: Evidence Ev 27

9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara very well laid out in the Marston’s evidence under which we do not see has any place in the relationship section 3; they list 13 diVerent forms of assistance between the lessee and the landlord. Obviously we which they have provided recently. understand it comes from a construct but we do not see the point; we do not see the future. We actually Q178 Roger Berry: That does however, does it not, think it is pretty unfair because, as the committee Mr Hayward, suggest the BBPA’s code is not the will understand, the basis of the rent is a divisible reason why the leasing arrangements are changing. profit. If you divide the profit, half for the lessee/half You are saying the market is doing this for us. If that for the landlord, in there is the amusement machine is the case, Rob, it suggests it is not your code that is tie and the profit on the amusement machines is doing it. already divided 50/50 but the tenant’s 50% of that Mr Hayward: No, I was answering a question in profit goes into his net profit which is hit with relation to Brian Binley’s question about upward another 50% calculation, so that eVectively the only rent reviews and I was commenting specifically landlord gets three-quarters of the amusement on that particular matter. There is no question that machine income, notwithstanding any other side there are other factors that have now stepped in and deals with the amusement machine supplier by way are dramatically aVecting the market and the of royalty payments. companies are responding to those circumstances. Q182 Chairman: Could I ask Mr Hayward to Q179 Mr Oaten: I was confused about who helps the comment on that particular observation? pubs with arbitration. Mr Hayward: As far as we are concerned, I disagree Mr Hayward: In terms of individual, they will with Nick because, as he indicated, as part of the generally either turn to the LVAs, of which there are construct, using his term, there is a variety of regrettably very few nowadays, or alternatively they diVerent forms of leases and tenants’ agreements and will refer to their professional advisers, some of some include game machines and others do not. In whom you gathered evidence from at the previous terms of providing game machines, because the session. companies concerned have experts in those, they will advise pubs as to what sort of gaming machine is Q180 Mr Oaten: None of you three organisations best for their particular venue and they have a vested get involved with helping with arbitration? interest in doing that in terms of maximising the take Mr Hayward: Although we say “would”, I have on it. There are varying relationships. generally advised them and we have never dealt with Mr Bish: I have to leap in there. We are not a united a case specifically because we are, as has been voice by any means, as you will have observed, on indicated, a membership organisation of companies this but there are royalty payments to fruit machine and therefore we would expect the individuals to suppliers. These are passed on into the pub estate. seek advice elsewhere, and I have on occasions We certainly have a particular operator who has advised them so to do. given me information that the same machine from Chairman: We will be doing more on arbitration the same supplier is charged by one company £16.50 later. We will move on. a week more than the same machine from the same supplier that another company supplies. So that Q181 Mr Wright: In terms of the wet rent and the does not really stand up. beer tie, can you explain what the benefits of the beer tie and other ties such as on amusement machines Q183 Mr Wright: You are saying that the pubcos can are for tenants? really determine what machine operator they use to Mr Hayward: In terms of any tie, it is part of an put the machines in rather than being free to choose? overall agreement with a landlord. There are some companies that only operate a property tie; they do Mr Bish: That is part of that tie. not have beer ties or whatever. I think those companies that operate a beer tie or other ties would Q184 Mr Wright: Mr McNamara, do you have quite reasonably argue that that means that they are anything to say? much more committed to the development of the Mr McNamara: As a professional body, we clearly business; they are not just interested in getting the have a line to maintain as an independent rent from a property, however it performs. That is organisation that has representation across the the reason that you have BDMs, et cetera, because whole industry. All we have tried to do with the there is a direct, specific interest in ensuring the accreditation process, for example, and the codes of business continues and grows. It is to the advantage practice is to make it very clear to try to ensure that of both parties. those oVers are out there and are understood by Mr Bish: The matter of the beer tie is rooted in anyone signing those hopefully under advice what history. We do not believe it has a place, rather like the ties are, how it works and how it operates. As a my earlier remarks about the lease generally, the charity, that is all we can say. value of the fair maintainable trade; we do not see its value, certainly for a lessee, in modern circumstances. We understand the point about Q185 Mr Wright: It is interesting, Mr Bish, that you keeping the beer tie and we understand that it is said that as far as the machines are concerned, the connected with the brewery, but we are more outlay should not be a part of the agreement. What concerned about the fruit machine tie, the AWP tie, do you think would be the eVect if either one or both Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 28 Business & Enterprise Committee: Evidence

9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara of those—ie. the wet rent and the amusement Q189 Mr Wright: Is there any evidence that the price machine tie—were actually abolished? What would of beer in the pubs has gone up more so in pubco be the eVect for the pubcos? pubs than in brewery-owned pubs or free-trade Mr Bish: The amusement machine tie going would pubs? reduce their income dramatically, we think probably Mr Hayward: We, as a trade association, would not of the order of £5 to £10 per week per machine per be allowed to look at that sort of financial detail for pub, but I have not pyramided that up for a nice obvious competition reasons. I do not have those round millions I am afraid. figures.

Q186 Mr Wright: What about the wet rent? Would Q190 Mr Wright: Surely somebody must have some it result, do you think, in the pubcos having to sell element of the figures that come through to the properties; i.e. that they would no longer become industry? profitable companies? Mr Hayward: I am afraid that, if we started Mr Bish: It is more complicated in the sense that it collecting that sort of— is where we are and suddenly to change it overnight Mr Wright: But I could go into a pub and find out would be cataclysmic for the industry, the today the diVerence in pubs. reconstruction of the industry. What we would like to see is it phased forwards, probably reflecting the Q191 Chairman: Who might have such information? ability of lessees to choose or having a transparent Mr Bish: The data collection agency, Neilsen, would and open way to choose, but we have no problem be most likely to have that information and that particularly with the beer tie and the smaller would be raw data on which you could put your own brewery. interpretation.

Q187 Mr Wright: Would not the theory be that the Q192 Mr Wright: Finally, in terms of the wholesale tenant, the beneficiaries, of this would then be able price of beer, we know since 2004 that figures suggest to move forward with their business with a free hand that the wholesale price of beer has gone up by 50% to develop and choose and pass on that saving to the and the discounts that the pubcos can get and indeed consumer? That would be the eVect. You say it the free trade can get has also increased in valuation, would be cataclysmic. It may well be for the pubco but the evidence suggests to us that, whilst the but surely it would not be fore the tenants? discount has actually increased as well as the price of Mr Bish: You could go there. We have not done the the products, pubcos are not passing on any element sums and we would not want to see the tie removed of that extra discount to the tenants. In other words, overnight but, because it is a complicated deal, we I think it was before 2004 that the tenants would would prefer to see the lease businesses have the receive probably £0 to £40 discount or up to £50 wider choice and then the tenancies and then you discount, whereas now they still receive the £0 to £40 would have to take a view in the smaller businesses. or £50. In other words, the pubcos are keeping the I really do not have much more to say on that rest of that profit that they can make on the because we have not explored down that line. I only barrelage and, therefore, it is not just the tenant who know my members’ experience. loses out, but the fact is that the tenant has then to put the whole price of that increase on to the product Q188 Mr Wright: In terms of that, you say and, therefore, the consumer is actually having to “overnight”; if it was over a period of time that they pay more on that. Is that not the fact? could negotiate a way down, would that be Mr Hayward: For obvious reasons, I do not think we acceptable to the industry? Do you see that as being can comment. They are issues for agreement less cataclysmic for the industry and certainly of between the individuals and the company. benefit over the long term, say over a period of five Mr Bish: We broadly make that statement, what you or seven years perhaps? have just said, in our submission. Mr Bish: I can see that individuals would have the opportunity to rebalance their business and that is Q193 Mr Wright: Which is that the consumer would what they fundamentally want to do, but the be the one to pay more and obviously it goes against industry is made as it is and, as I say, I think it needs and, therefore— to be evolved not revolutionised. Mr Bish: The discounts available to lessees have Mr Hayward: I was going to make the observation diminished as a proportion of the total discount that for example, and this is how the BBPA operates, available over the years. we do represent the industry as a whole on a wide range of issues. On the question of gaming machines, Q194 Mr Wright: Mr McNamara? for example, we are in discussion with Government Mr McNamara: We have no views on it. at the moment in relation to stakes and prizes. That is a negotiation from which all pubs will benefit if we are successful. There is a raft of things on which we Q195 Chairman: Does this concern you? You are do the representation and all the industry, whoever making a bland statement, but it does concern you? they may happen to be, including pub landlords, will Mr Bish: Absolutely, and it is in our submission. benefit. We won a legal case last month in relation to broadcast music against PPL and it will be the Q196 Chairman: Just express yourself a little more landlords who benefit from that. freely for a moment. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business & Enterprise Committee: Evidence Ev 29

9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara

Mr Bish: Yes, of course we are unhappy about that. another. How that is addressed, and I know you are We see the squeeze on the business ever-tightening trying to grasp it, there certainly does seem to be a and the part of it that is wet rent there is increasing gap in some cases, there is no question about that. and in proportion to the dry rent as well. Mr McNamara: We are not a trade protection body, as I have made clear, but we are a professional body. FLBA, Tony Payne does a remarkable job in terms Q197 Mr Wright: So really I can answer the question of going and representing people in various disputes myself because, in theory then, if that extra discount and various issues in his patch. Comment has were passed directly on to the tenants of the pubcos, that would certainly help the tenant, it would already been made about the old LBAs who fulfil probably help the consumer, they could sell their some of that role. I think there is a gap there that needs to be filled. Again, as a professional body, we product probably for one, two or three pence a pint Y cheaper and still keep the figures up and, therefore, try and use our good o ces where we can to make everybody would be a winner? sure that tenants at least and lessees have some Mr Bish: More or less everybody. instant guidance, support, help and advice, and we Mr Wright: Except the pubcos! need to spread that message to make that more widely known.

Q198 Mr Bailey: According to BBPA’s submission and BII’s, there are very few disputes between Q201 Mr Bailey: Mr McNamara, it has been put to tenants and their landlords. According to David the Committee that one of the reasons you do not Morgan, representing tenants, he has three to five seem very proactive in dealing with tenants’ referrals a day. How can you explain this complaints is that you have a financial interest discrepancy? through the pubcos, an issue which I think Mr Mr Hayward: We indicated the issues that we deal Binley was trying to tease out earlier. Could you with and we did not comment in relation to the total comment on that? number of disputes, and I have already indicated Mr McNamara: I think we have been as proactive as that I would generally advise landlords, if they had we possibly can be in terms of, number one, getting a problem, to go to an organisation or a professional involved in codes of practice, number two, oVering individual who could advise them to do so, advise a legal helpline which is freely available to all them in relation to the process. members, number three, we, as I have said before, Chair, are very interested in trying to arrive at an independent expert determination service which is a Q199 Mr Bailey: So you do not dispute that there are low-cost attempt to arbitrate between two parties in an enormous number of disputes? a dispute on a rental agreement, for example. Those Mr Hayward: I do not dispute there are a number. I are all things that we would do as a professional have no idea what you are putting in terms of body and a membership organisation. We are a “enormous” or whether there are or there are not; charity, we are a professional body, we are governed there are clearly disputes. by charitable objects and we cannot get involved in Mr McNamara: We reported the raw figures in terms trade disputes. Some of our members are corporate of the legal helpline calls we get and the queries members clearly and all of the money that we raise under the codes of practice. We hope, as more and from those sources, which is, I suppose, in total, more codes of practice reach the accreditation about between 1 and 2% of our income, goes directly standard and we publicise our website and our back into the industry for all the social responsibility magazine, that those codes are there and, if there are breaches, they should be followed through within initiatives we organise, all the qualification the company and, if they cannot satisfy that, contact development we do and all the other things we do to us. We hope we will see that more people, and it support members, so we are very much there as a seems a perverse thing to say, recognise that we have support service for members within the terms of our a role to play in there if we can help in any way to charitable objects, and I would argue that we have resolve some of those disputes. All we were doing been very proactive in trying to make those advances was reporting those raw figures and there may well in support of members where we can. be more issues out there than we are seeing being referred to us. What we are saying, as a professional Q202 Mr Bailey: I think everybody would say that body, is that, if the Code of Practice is an issue, if you the development of a low-cost arbitration service have an issue where you cannot get instant advice, would be a benefit, but the fact that it does not seem use our legal helpline, and that is available to all to be used seems to indicate that not many tenants members. either understand, or appreciate, it. Mr McNamara: To clarify, that is work in progress Q200 Mr Bailey: Would it be fair to say that there is at the moment. We are now taking legal advice and a gap in the provision of help and assistance for we are going and talking to pubcos. Our national tenants in terms of dispute-resolution throughout council and our members are very much in support the structure of the industry? of it. It would mean a very cheap, short, sharp Mr Hayward: I think, given the instances which have resolution to some of those disputes. It would not been cited in the previous evidence, those of which I involve going to a full court or arbitration process am aware, there is clearly a gap in some form or and it would be far cheaper for our members, tenants Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

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9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara and lessees to use that, and it could be non-members previous years, so the way it is constructed at the as well of course. That is something that we hope to moment does not work for leases. We do not like the launch in the early part of next year, and clearly we FMT and we probably do not like the beer tie, as will report back to the Committee in terms of such, for a long lease and those are the areas that we progress, but that, I think, will be a real step forward feel that we can explore. The tenancies are diVerent. and it would remove the fear that some tenants and lessees have of, “If I go to arbitration, if I do lose, it’s Q205 Mr Bailey: There does seem to be a divergence possibly £50,000 or who knows what that cost would of opinion between you two on this. What is being be”. With this independent service, which we would done to resolve it? sponsor and advocate, it will be a very short, sharp, Mr Bish: Well, I suppose, with respect, you are doing clear process with a set cost which could be easily a lot of that yourselves because these points are resolved between the two parties, and we think that aired, but we have a lot of research on the costs of will be a good step forward and more would come running a business which have gone up dramatically, forward for arbitration hopefully. and ALMR is running the third of its benchmarking costs and proving conclusively that the costs of doing business are much, much higher to the Q203 Mr Bailey: Can we just move on to the pub disadvantage of the salary or the drawings that a leasing model, the Code of Practice. It would appear lessee or tenant can take for him or herself, and this that in certain circumstances the leasing model is information we can make available to the rather out-of-date and out-of-line with the Code of Committee, but we need to understand the market in Practice. What should be done within the industry to its present form and it is being squeezed a lot. align them? Mr Hayward: I am not sure that I would agree with Q206 Mr Bailey: We are dealing with this because the actual model, although Nick disagrees with me you have failed to do so and I just wanted in relation to this. The process, the arrangement in reassurance that you are making so much eVort on relation to a tie and lease has operated for a long your part to resolve this situation. time and, as I said earlier, it has been reviewed on a Mr Bish: Well, ALMR talks to the pubcos and we number of occasions, and, although the Fair Pint have a communications channel where we address representatives at the previous session argued that multiple lessees’ issues with the pubcos. The channel there might be an abolition of the tie, they then also exists, I would not have said it was hugely said that they thought that it would be reasonable productive, but it works on a tactical basis and that below 500. Now, there is no reason why and you is a route to address the major strategic issues that we either do away with the system or you do not. There discuss, and of course the outcome of your are clearly adjustments that have to be made over recommendations will undoubtedly move the periods of time because circumstances change and, argument further forwards, which is why we are arising from the last sessions some four years ago, trying to help you with it. there were changes made. I have no doubt that going Mr Hayward: In relation to this inquiry, I have forward, as John has indicated, the process of indicated previously that we made changes to our arbitration will develop and there will be changes in Code, but I think there is a supposition in your relation to the codes. question, and I may be reading too much into it, that actually the lease agreement is an unchanging model. Clearly, because of the nature of the business, it is not an unchanging model. There are some serious Q204 Mr Bailey: Would you like to comment on V that, Mr Bish? di erences now from what there were previously and, if we sat here in four years’ time, I am sure that Mr Bish: I think the particular point is the leased there would be further changes because that is the business and the leased business is for a longer nature of business and that is the nature of the pub period of time and I think it is the leased business trade. Twenty years ago, everything was wet-led, that needs the most addressing. Just to remind they did not serve food, they were owned by the ourselves, a full repairing lease, which is the brewers and there were the Beer Orders and the like, distinction between really the tenancy of the old days and we now have a substantial change and it is likely when the landlord, the brewer, probably looked after that in five or ten years’ time the nature of the pub the fabric of the building, a full repairing lease is this will have changed again, and the nature of the independent nature of the building. It becomes a leasehold agreements will have changed because business that can be sold on and historically, and we those who are negotiating it on both sides will have have seen it over the last ten or 15 years, that is sort come to an agreement that the nature of that of five times earnings, so that was a value on the agreement has to be diVerent. business and it could be taken on. Into that, profit, Chairman: I fear we are really badly out of time. We when the business was sold on, could be absorbed have not run quite so late before under my some of the costs that the lessee was liable to, but, if chairmanship and I apologise for that and I now in this current market you can only sell it on at apologise to the next witnesses as well who have been one or one and a half times earnings, there is kept waiting. There are many other questions I absolutely no money left over to exit the lease, to would have liked to have asked, but there just is not take advantage, take a profit from, make a success of the time to do so. Perhaps you can reflect on what all the tenants’ and lessees’ hard work over the you have told us and, if you think there are things Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

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9 December 2008 Mr Rob Hayward, Mr Nick Bish and Mr John McNamara that you would have liked to have said and you did which, I think, are promised between us which we not say or you want to clarify, please send further will sort out later. Gentlemen, thank you very much written submissions, and there are some things indeed. We are very grateful for your time in coming.

Witnesses: Mr Giles Thorley, Chief Executive, and Mr Giles Kendall, Regional Operations Director, Punch Taverns plc, and Mr Ted Tuppen, Chief Executive, and Mr Simon Townsend, Chief Operating OYcer, Enterprise Inns plc, gave evidence.

Q207 Chairman: Thank you very much indeed. Can hour each for a couple running a pub. Now, do you I begin by asking you to introduce yourselves for the recognise those figures? Can you challenge those record, so we all know who you are, beginning from figures? Do you regard them as acceptable? the right. Mr Tuppen: I certainly recognise them because they Mr Thorley: Giles Thorley. I have been in the were published in the paper by Morgan Stanley that industry for 12 years with Phoenix Inns, with was seeking to draw attention to the fact that some Unique Pub Company and now as Chief Executive of our licensees were struggling in very diYcult of Punch Taverns. circumstances. I recognise the words, but I do not Mr Kendall: Good morning. I am Giles Kendall and recognise the facts underlying them. With due I have been in the industry for nearly 30 years. I respect to the analyst involved, he covers the entire started oV with Allied Breweries where I spent nearly leisure sector and he is a sell side analyst who has an 20 years, then Pubmaster, which was supposed to be interest in helping people form views on businesses one of the smaller pubcos. I have worked now for in order for trades to take place in shares. I think that five years for Punch, I am the Regional Operations the amount of time he is able to give to research on Director responsible for the south-west of the a particular issue is perhaps not as high as it should country, starting oV with south Birmingham all the be. From our own data, and I am very happy to way through to Devon and and also south share with you the presentation that we made to Wales, just over 1,000 pubs. analysts of our preliminary results, we showed that Mr Townsend: Good morning. I am Simon a handful, and I believe the numbers are 112 of our Townsend and I am the COO of Enterprise Inns and licensees, are actually earning profits in the band of I am responsible for the day-to-day operations of the £20,000 and below. The average profit for our business. I have been in the industry for my entire licensees we estimate to be in the region of £42,000 career, 22 years, with , Allied, the Rank and I am completely prepared to accept that in these Y Organisation, Marston’s and for the last ten years di cult circumstances, and let us be clear, these are with Enterprise. unprecedented circumstances for the industry, as for Mr Tuppen: I am Ted Tuppen and I founded many of us in any sort of business, the licensees may Enterprise Inns in 1991 and I have been Chief well be earning a bit less. But with the quality of our Executive ever since. estate, the help that we give and the underlying base of around £45,000, then we feel that, even though these licensees may be earning less, on average they are still earning enough to have what would be Q208 Chairman: We will try not to ask you any regarded in diYcult circumstances as an acceptable moronic questions, Mr Tuppen, a choice turn of living. Perhaps I could just address the issue of the phrase from The Morning Advertiser, I thought, very “moronic” licensees because I do find that obviously interesting! Talk us through the annals a few weeks quite diYcult to take, and I would like just to address back: “Tuppen referred to [politicians who signed the issue as regards the one particular MP to whom the EDM] as ‘moronic’. Setting out a few key facts, I was referring. He is a Liberal Democrat MP who like just how few closed pubs belong to the five wrote to me in March, saying to me that he was largest pubcos, he added: ‘It’s worth saying in case outraged that the rent of a particular pub in his anyone meets a politician’”! Well, you are meeting a constituency had increased, or was going to increase, politician today, several of us, Mr Tuppen! I am by £10,000. We wrote back immediately, our going to start by disappointing the audience, who Regional Manager wrote back, saying that we felt clearly are very excited about it, by saying that I do that it was only right to tell him that we had done a understand the financial pressures your companies rent review on this pub and, because trading are under and obviously the gearing levels are very conditions in Otley were diYcult, the rent had not high, exactly, but we cannot sacrifice an industry been increased at all. The said MP then wrote back because you make commercial misjudgments in the a very nice letter thanking us for our attention to the way you choose to finance your organisations. That trade in and thanking us for taking due would be my “moronic” point, but can I just ask you consideration of this in not putting up the rent of this one factual question, I think, to both witnesses. The particular pub. Some four months later, this Financial Times carried a story yesterday, which you gentleman gave an interview to the local press, and undoubtedly have read, about the industry and I will give you all of this documentation afterwards, pubcos. It indicated that licensee profits were lower if I may, where he suggested that we should hang our than £20,000 in 17% of Enterprise pubs and, I think, heads in shame because we had put the rent up of this 28% of , representing income of £3.30 per pub by the £10,000 that he had imagined some four Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

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9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend months earlier. Now, I do not believe that MPs are businesses, and I would reiterate that our business moronic and, if any of you are oVended by that really survives on a partnership between ourselves comment, I would like personally to apologise and and the people operating our pubs for obvious I would like to apologise for that because I was not reasons; if they are successful, then we are successful. referring to all of you, but on this particular— In addition to the business relationship manager, we also have experts around property, machines and Q209 Chairman: So The Morning Advertiser got vendings, a catering executive, which is an you wrong? increasingly important part of the overall mix of the Mr Tuppen: Well, I think it made a jolly good story sales of all our pubs, and also sales account and, as I say, I would like to apologise to any of you managers who go and sell very competitively priced who were oVended because I know you do a diYcult products to our customers, so, in and amongst all of job in trying circumstances. I also accept that this that, we really do pay a lot of attention around gentleman who made this mistake was probably providing support on a day-to-day basis for our over-worked and had probably forgotten the tenants and leaseholders. correspondence that had taken place between us some four months earlier. What he could have had Q212 Miss Kirkbride: Mr Tuppen, do you roughly the good grace to do was simply to apologise. agree with those advantages for yours rather than repeat what has just been said? Q210 Chairman: It is not the main signature on the Mr Tuppen: Yes, I am glad to say that we have an EDM that we are referring to here, just for even greater variety at Enterprise Inns of beer clarification perhaps. Under the legal action that is supplied to our pubs, that 1,391 diVerent cask ales possibly at stake here, we had better not go too far from 312 separate independent brewers are supplied down this particular avenue as I will get nervous to our estate. The sale of cask ale in our estate runs about sub judice rulings and so on. at about 14% and, as you know, cask ale is Mr Tuppen: But thank you for bearing with me while something that is very highly valued in this country. I was able to clarify that. When we took on the pubs from the brewers, Chairman: We are glad you do not think we are all because we bought many of them from the brewers, morons, Mr Tuppen, and we have sorted that out at cask ale was running at an average of about 2% of least, whatever else we agree today, and it is just that turnover and our commitment to cask ale and our Liberal Democrats are morons! commitment to the variety of products has increased that to now 14% of our turnover and, I have to say, Q211 Miss Kirkbride: We will let you put your case at a level of discount, which will not surprise you, to begin with. What are the advantages to your which is substantially less than the discount that we tenants of being owned by a pubco? would get from selling international brands. Mr Thorley: Extremely extensive, to be honest. In There is just one point, I think, for clarification that the case of Punch Taverns, we have a very significant I would like to draw your attention to, and I am sure package of services. Dealing with the beer supply, we you have read it, but the 2004 TISC inquiry did supply 280 diVerent to our pubs, we have conclude that “the tie usually balances the costs and invested almost £300 million in our pub estate since benefits available to tenants” and that “the existence the last review by this House, we have changed all of of the tie provides demonstrable benefits to both our lease agreements to plain English lease tenants and customers alike”. Now, the TISC in 2004 did not conclude that the tied tenant should be agreements and we provide a very comprehensive V training programme. Our Punch Charter was the financially no worse o than the free-of-tie tenant. first to be accredited by the BII with a couple of other That was never a conclusion. It is a point being operators and it is also in plain English, we have a peddled frequently by the Fair Pint Campaign, but clear process for dealing with complaints and, to the it ignores entirely all of the other benefits which Giles point which is going to be asked in due course, we just referred to that we give to our tenants. have had in the last five years one arbitration case in our estate and only ten independent expert decisions Q213 Miss Kirkbride: Why do you like to push your on rent reviews, so we clearly aim to settle any pubs into long-lease tied agreements rather than disputes we have with our customers in an amicable managed or free houses? Why can they not be way and in an eYcient way and it is just good allowed to choose? business to do so. We have changed our area Mr Tuppen: Well, we do not run a managed estate manager structure so that we have one area manager and we do have some free-of-tie pubs, just a handful. per 50 pubs and we also have operations managers, We genuinely believe that the tied system balances and I will ask my colleague, Mr Kendall, to talk the fixed costs and the variable risks and rewards about how that works in a second, to make sure that between the pub company and the licensee. If our we have people on the ground who are prepared, and tenants are doing well, they will sell more beer, they able, to provide advice to our customers on a will be successful and they will make more money. timely basis. They will eVectively at that time be paying a bit more Mr Kendall: The operations manager role has been rent. If they are doing less well, which they are at the around now for nearly two years and these moment, their rent goes down because they are individuals are our top-performing business buying less beer from us and they are paying less wet relationship managers, area managers. They are rent. For that, I also would stress the point that the very, very experienced and good at supporting the tied system does provide for licensees a low-cost Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

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9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend entry into the pub business. The average cost of a Practice that allows any tenant at any time to ask us good pub, as you can fully understand, is £700/ for a reduction in their rent, and we will speak to 800,000 or more and it would be very diYcult in that later. these circumstances, probably impossible, for anyone to raise the money to go and buy a pub. It is perfectly reasonable for them to raise the £30,000 or Q216 Miss Kirkbride: But how many of your pubs so that they may need to take on a pub and indeed, are on rescue packages or have gone bankrupt? if we find a quality operator, we will go out of our Mr Tuppen: During the last year, we helped 1,453 way to help them have to find less money when they pubs with a total of £9 million of help, so that is get in. For example, we would give them the chance around £6,000 per pub. Currently, we have about 800 licensees who are receiving help and the average to buy their fixtures and fittings over a 24-month cost per month for us is running at about £1.3 period. We really, really want good people running million, so we have got about 800 pubs in, as I would our pubs and genuinely we will bend over backwards describe it, some form of intensive care. to try and help get those people in. There is no interest for us in our pubs doing badly. Q217 Miss Kirkbride: And how many of your tenants have you evicted in the last three years? Q214 Miss Kirkbride: Do you have anything to add Mr Tuppen: It is about 184 people in the last year to that? primarily for breaches of their contract, which I am Mr Thorley: In simple terms, we have around just sure we will also come on to, so we have evicted 184 over 200 pubs which are leased on a free-of-tie basis licensees in the past 12 months. and one of the businesses that I was involved in was a free-of-tie pub company, so I have seen both parts of the equation. I made this point four years ago and Q218 Miss Kirkbride: Can you give us a flavour of it still is as valid today, that we could lease the pub those for you? for £20,000 income, just straight rent on a free-of-tie Mr Thorley: I cannot remember the order, but basis, or, alternatively, we could lease the pub for specifically in terms of aid where we are helping our £8,000 and we would receive, say, £2,000 for the estate, I think the number that we are helping is machine tie and £10,000 from the tie for the beer slightly higher. There are 1,800 of our pubs that are supply, and what you have is a very, very much lower receiving, and there is a degree of double counting cost fixed element, and the other remaining parts are there, some form of rent concession or additional changing all the time. I am involved in a restaurant discount on beer, given the unprecedented chain which has leases in shopping centres which are circumstances in the market at the moment. In terms often turnover-based and they change, at best, of the number of failures in the last year, I have not quarterly. Our leases are changing every single week. got the number of evictions, but there will be Every single week, somebody puts more money into materially less than that. It is 575, of which we have a fruit machine or less and the income is changing relet 484 in the same timescale, so you can see net every week and, for the person who buys more beer that it is just under 100 that have not been relet or less, the income is changing, and that is why it is thus far. so protected and that is why so many pubs still Mr Townsend: The whole purpose of the support survive in the UK today and it is probably the last which, I think, both companies are referring to there community retail outlet in many, many villages and in terms of the additional discounts that we provide suburban areas and we want to protect that; it is in or rental concessions that we provide during this our absolute interests to do so. period of temporary support, the whole idea is to prevent business failure. The idea of business failure and pub closure is the worst possible thing that can Q215 Miss Kirkbride: Can you give me an idea then happen to a business like ours. Businesses become about what is going on in your estate. How many of damaged, they can get to lose their consumer your pubs, taking both of you in turn, are making franchise and the costs associated with that decline money for you and how many are making money for in business, a period of closure for a pub that may your tenants, and we have a rough idea of the follow and the reletting of that pub are the worst average income, but just so that we know what is possible costs that we could wish to incur, so the going on? whole idea of the business support that we are Mr Tuppen: Over the last four years since the TISC providing is designed to try and prevent business inquiry, coincidentally to some extent, although I failure. I would also wish to make one point, that suppose, given the nature of the agreement, not that there is a sort of urban myth that has been surprisingly, our income from pubs, our gross propounded by various parties that the temporary margin earned from pubs has increased by 7% and support provided by companies in some way is that is exactly parallel with the growth in earnings repayable, and can I make it very clear that, as far as for the tenants which has gone up by about 7.2%. I Enterprise is concerned, no amount of the business guess it is interesting that, whilst RPI has gone up by support that we provide in additional discounts or 16.1% in that time, our average rents have increased rental concessions is repayable; that is simply not the by just 10.4%. That is reflecting the fact, and I am case. This is permanent financial assistance over a sure we will come on to rent reviews, upwards-only temporary period of time designed to prevent the and downwards-only, that we do have a Code of business failing. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

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9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend

Q219 Miss Kirkbride: You both have a rather eye- number that you actually have to throw out of the watering level of debt loaded up into your pubs. What are your figures for the number of companies. Do you think this is really a very good tenants that have just handed in the keys because business model and are you not actually putting they cannot make the businesses pay? something that we really value in this country, which Mr Tuppen: I have that number as well. It is 170. is our pub structure, at risk by running, what some Mr Thorley: I actually just gave that number people might consider, a very reckless business because I do not have the number of insolvencies model? and the number was 575. Mr Tuppen: I think that, as you say, the numbers are quite large and I think that, if you were to go along Q226 Mr Hoyle: That is your total? to get a mortgage on a house at the moment and you Mr Thorley: Correct, yes. said that you were only looking for 60% of the value Mr Tuppen: Mine was 170. of your house as the mortgage, you would be received with open arms. The recklessness that we Q227 Mr Hoyle: Out of? have seen has been from people who have borrowed Mr Tuppen: Out of 7,500 pubs. I accept the point 100 or 105% of the value of their houses. The that you were trying to get to about pub closures, but numbers are big. We have a lot of pubs. We have pub failures may not appear in the statistics and I am approximately £6 billion worth of pubs and we have completely prepared to accept that, which is why we approximately £3.6 billion worth of debt. That is a specifically found these numbers for you. The 170 is 60% mortgage. If you knock a few noughts oV and about three pubs a week out of 7,500. We treat each if we had a £600,000 pub and a £360,000 mortgage, of those with equal seriousness, and Simon will help I do not think that you would regard us as reckless. me with this, but we find that a closed pub is The numbers are big, but we have a lot of pubs and genuinely the worst possible thing that could happen I think it is far more a function of our scale than a to our business. We will bend over backwards. We function of our recklessness. are not a bank that may repossess from a remote head oYce. We have regional managers who, in most Q220 Miss Kirkbride: I would be interested to see cases, have become very close to the 50 or 60 what the valuations are based on and when— licensees that they are looking after and, were that Mr Tuppen: I am sure there will be a question pub to fail, it is not just a heartless head oYce writing mark there. down one more statistic, but it might well be a meeting that ends in tears because the licensee has Q221 Miss Kirkbride:—property prices or earnings, recognised that they really are not going to make it but that is a matter of conjecture. and, in most cases, I would like to say we have done Mr Thorley: The vast majority of our debt, and I our best to help, but the reality in the current mean 95% of our debt, is on a long-term mortgage, economic climate is that businesses fail. The it is 30-year money at a fixed rate, and the level of percentage of pubs that are failing in our particular debt that we have on our business is the same as it sector is far less because we have this strong vested was over the last five years. Now, it would have been interest in helping people to succeed. Now, let us be reckless in the heady days of 2007 to increase the very clear. There are people who, in very plain terms, amount of debt that we had in the business and are stealing from us from buying outside the tie and actually we began reducing our debt at that stage. In we have absolutely no hesitation at all when we catch terms of our business, we have £6.5 billion worth of them in, first of all, giving them a chance and saying, property and we have revalued part of our portfolio “Okay, you may have made a mistake. You may down, reflecting the current market conditions, and have misunderstood some of the points put forward we have just under £4.5 billion of debt, so it is less by the Fair Pint Campaign and regarded buying than 70% which, in a Mrs Beeton’s school of finance, outside the tie as some sort of Robin Hood crime, is the same as the vast majority of people have stealing from the rich to give to the poor, so we will financed their houses in the UK where they have a give you a chance to put that right. However, if you 70% mortgage on a 25-year fixed basis. do it again, we’ll have no hesitation in throwing you out”. Can I just give you a statistic because it is Q222 Mr Hoyle: This is quite interesting and can I vitally important for you, ladies and gentlemen. get it right, roughly £6 billion in assets, in pubs, and Were each of our pubs to buy, outside the tie, one £3 billion in borrowings? barrel a week, we would lose £7.8 million in income. Mr Tuppen: It is 3.5, about a 60% mortgage. For the Treasury, given that the majority of these barrels of beer would be purchased for cash, were Q223 Mr Hoyle: When were they last valued? they to be purchased for cash and were they then not Mr Tuppen: This year. to appear in the books of the pub, there would be VAT, income tax and corporation tax fraud Q224 Mr Hoyle: So that is on present-day values, so amounting to £8 million. that is okay? Mr Tuppen: Absolutely. Q228 Chairman: Are you suggesting that fraud is widespread among publicans? Q225 Mr Hoyle: So it is just a little bit of recklessness Mr Tuppen: I am saying that in certain cases one of and you are not insolvent, and that is what we can the reasons that people will seek to buy outside the say. You talked about the number of tenants and the tie will not just be to buy more cheaply, but we have Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

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9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend strong evidence, and we will report this to the Q236 Mr Hoyle: So it is large-scale or not? Revenue & Customs whenever we get it, that some Mr Townsend: No, I do not believe it is large-scale, of that buying outside the tie is done to make more but there are significant instances and we will money by buying it for cash, by not putting it provide evidence to the authorities when that occurs. through the books and, therefore, avoiding VAT, Mr Tuppen: Can we also be clear that we do not income tax and corporation tax. believe that buying outside of the tie is wide-scale. My whole point is that there are people out there who choose to buy outside the tie and they are Q229 Mr Hoyle: It is a very serious point you have stealing money from us, and I do not want to sound made because presumably then the breweries must as if I am seeking too much from this, but this is be in on it to sell it for cash because they have to money that we would be happier to give to people account for the beer that they brew. Is that what you whom we want to help who comply with their are really telling us? responsibilities. Mr Tuppen: I am not suggesting for a moment that Chairman: You have opened up a can of worms here, the major breweries would do any such thing. I think Mr Tuppen, but I think that it is very important that there are, however, wholesalers. we examine this.

Q230 Mr Hoyle: Hang on, you cannot have this both Q237 Roger Berry: In seeking to know whether this ways! Let us be realistic. You are misleading us a is a significant question or not, are we talking about little bit because the brewery sells to a wholesaler, so, ten cases, 100 cases or 1,000 cases a year? What are therefore, there is a VAT transaction on it. the ballpark figures? Mr Tuppen: Yes. Mr Tuppen: In the past year, we have identified, caught and communicated with four particular wholesalers who have been delivering to a large Q231 Mr Hoyle: So there is VAT and it is accounted number of our pubs. for, so what you are saying is that somewhere along the line there may be cash, but it has been at some time VAT paid-for. Q238 Roger Berry: How many references to Mr Tuppen: If the pub buys the bottle of whisky or individuals who are committing tax fraud have you barrel of beer, be as it may, for cash and fails to put reported to Revenue & Customs over the last 12 that through the books of their business, they will be months? committing a VAT fraud and they will be under- Mr Tuppen: I do not know the answer to that. declaring for income tax purposes. Q239 Roger Berry: Well, is it one, is it ten, is it 15, is Q232 Mr Hoyle: So it is not the breweries, it is the it 100, or 1,000? wholesalers that are all on back-handers? Mr Tuppen: We will come back to you with that Mr Tuppen: No, I did not say all of them, I said in data. certain instances, and we will happily provide you with evidence. Q240 Roger Berry: I have to say, you have made a very serious allegation and you have taken an enormous amount of time on this particular issue, so Q233 Mr Hoyle: How many instances do you have I assumed you knew whether it was ten, 100, 1,000 in a year? If it is wide-scale, you must have the figures or what. What kind of ballpark figure are we talking and you must have been to the police, saying, “This about here? is a major criminal investigation”. Mr Tuppen: Let me explain to you the point of my— Mr Townsend: We absolutely do provide evidence to the police where we find evidence of wholesalers who, for example— Q241 Roger Berry: No, I would prefer it, given that you must know the ballpark figure, and in my work I know ballpark figures, are you talking about ten a Q234 Mr Hoyle: How many times have you been to year or 50 a year or 100? What kind of figure are we the police in 12 months? talking about? Mr Townsend: We will have records of that and I Mr Tuppen: We believe that the vast majority of our would be happy to provide that to the Committee. licensees comply with the terms of their contracts.

Q235 Mr Hoyle: Come on! It is so serious, yet you Q242 Roger Berry: That does not answer my are telling me that you do not know. question. How about answering my question? Mr Townsend: Please let me finish, and this is so Mr Tuppen: There are some who will buy outside the serious. We have got photographic evidence of tie. It is our view that within that group there are where wholesalers have been providing equipment some who will not be declaring those purchases. to our pubs to allow them to bypass the beer-flow metering equipment that we put into our pubs in Q243 Roger Berry: Mr Tuppen, why are you refusing order to ensure the validity of the contract that we to answer the question? You raised this specific issue have with them, and we have got evidence of as a crucially important one, so why are you refusing wholesalers who have done that. to answer the question? Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 36 Business & Enterprise Committee: Evidence

9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend

Mr Townsend: If I can help, we are pursuing an issue Revenue & Customs are probably the biggest closer at the moment with a group of six licensees in the of pubs in the UK of all types, not just in terms of SheYeld area that we caught literally in the last the people who take action first and foremost, and month and we believe that the estimated amount of you can, I am sure, through your good oYces get illegal purchases that they have made outside of their those statistics. The reality of the situation is that the contract with us amounts to some £72,000, six pubs. factors that will aVect the price of beer are very, very Now, that is a very significant issue, those six pubs in significant, and I would refer you back to our that area, and we will be pursuing that with the full submission and the TISC in 2004. It is in Hansard force of the law. [sic] Ev 239, Table 2 on page 34 of our submission, and it breaks down a whole heap of things. We know Q244 Chairman: Are they, by definition, in breach in everyday life how business works in terms of with Customs & Excise as well or just with you? determining price and it can be a number of factors. Mr Tuppen: The point I am making is that, once For example, if I am going to go and buy a television, people have breached their terms of trade with us I can go and buy it on interest-free credit or I can ask and if they are in a position where they have paid for an upfront discount. They are actually diVerent cash for this, they are then possibly in a position. ways of getting the same result and there are very, Now, we think it is our responsibility to report those very diVerent ways of pricing beer. Now, in the to Revenue & Customs. We found that another pub, evidence that we provided in 2004, which was using which was close to a football ground, put in special the AC Neilsen data which was referred to by the equipment on match days and, by their own previous witnesses, it showed that there are three admission, stole £40,000 worth of beer from us over main diVerent routes to market, free houses, tied the last three years. Now, these are very serious pubs and managed pubs, and, interestingly, the issues, this is not a Robin Hood crime, and I am not diVerence, on average, of a pint of beer between the suggesting for a moment, let me just make this very three routes to market was less than one pence and clear, that this applies to other than a small the most expensive were the free houses and the least proportion of our estate and we do take it very expensive were the tied pubs. Now, the cost elements seriously. In the first instance, they are, without of those businesses and the components of those doubt, stealing from us. There is a possibility, and it businesses are totally diVerent and the route to is our responsibility to report them, that they may in market methods of the operators are totally a few cases also not even be declaring this to diVerent, yet it shows that there is a free market in Revenue & Customs. terms of determining the price because the prices are so similar. Q245 Chairman: So, if I have a pub in my constituency, not one of yours, who can actually see Q248 Mr Wright: Just in relation to the pubs which the beer being sold by a pub managed by the same act outside of the agreement, what happens at chain down the road for less than they can buy it for weekends when suddenly on a Friday evening a to sell themselves in their own pub, there is a real coach trip turns up and the pub has sold out of beer incentive to do this. and there are no deliveries at weekends, no Mr Tuppen: I do find that argument very hard to emergency deliveries? Would you expect the pub to take because— shut down or would you expect them to actually go out and purchase the beer? Q246 Chairman: A pub I know, and I could take you Mr Townsend: If they were genuinely out of beer, to it, not one of yours, can see a pub down the road having sought our own sources first, if it is after selling the beer to consumers more cheaply than they Friday night and the telesales department is not can buy it themselves and the pub is managed by the available, the first thing we would expect them to do same chain as owns theirs. What is the logic? is ring their regional manager who can then organise Mr Tuppen: Well, we have been talking about for them an additional delivery on a Saturday pricing and we have been talking about statistics. morning, if that was what was required, because our There is a piece of research that came out yesterday distributors do work through Saturdays. Secondly,if supported by Numis which shows that the average the distributor is not available to make a delivery, price of beer in tenanted pubs, in our pubs in they can actually arrange a collection from the depot particular, is slightly less than the average in themselves. Thirdly, if either of those two things are managed houses. Now, there will always be cases not available, we of course can give them permission where a particular pub can sell beer for whatever to go and borrow from another pub and make it very price it likes. We do not control the price at which clear then that there is a reconciliation between the beer is sold in a pub. beer that has gone into the pub and the beer that has been sold out of the pub. There are plenty of facilities Q247 Chairman: But you control the price at which available by legitimate means to enable the pubs to you sell it to them. Can I just ask our colleagues, the trade through exceptional circumstances like that. Gileses, if they have any observations on this problem about stealing from pubs. Do you recognise it? Q249 Mr Wright: We had evidence from a lessee who Mr Thorley: Well, I think using the word “stealing” said that he ran out of beer and was okayed by the is rather pejorative. I have no idea what level of VAT area manager verbally and later had a huge fine some fraud there may be. I think it is worth saying that months down the line. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

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9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend

Mr Townsend: I could not possibly comment on that Mr Tuppen: Just to be clear, we have as much time specific case, but, if one of our regional managers has as you need. formally agreed to allow one of his pubs to buy Chairman: We have to finish by 1.15, that is our outside of the tie because of exceptional deadline, so I am sorry, Anne, we have got to move circumstances, then there is a record of that purchase on. that is made. It is inconceivable that one of our pubs would then be fined for making that purchase later; that simply would not happen. Q255 Mr Bailey: First of all, it has been put to us that prospective tenants are seduced by pub companies’ websites, publicity agents and so on and Q250 Mr Wright: It may not have been one of they submit business plans which are accepted and your pubs. then subsequently prove to be unacceptable to the Mr Tuppen: If it is one of our pubs, we would be very tenant. Now, obviously the tenant has to bear some happy to go down the mine and look at the responsibility for this. However, it would appear information on that. We do make mistakes and we that the pub companies are accepting business plans do not normally get away with them, not today which they must know, by the body of their collective anyway. experience, are going to result in subsequent dissatisfaction. How many business plans are Q251 Mr Oaten: I just wanted some brief actually turned down by the pub companies? Can clarification on something. Mr Thorley, do Punch you give me figures from yours? agree with the statements made by Enterprise on Mr Tuppen: We can answer that. One of the things fraud? that, I think, is hugely important is that we do not Mr Thorley: I have no idea about the magnitude. It want the wrong people in our pubs. Following the is certainly the case, and it was on Radio 5 Live this recommendations of the TISC, we confirmed the morning, on Wake Up To Money, there was an practice that we actually pay licensees £250 if they article, nothing to do with the pub industry, which say they cannot aVord to get professional advice. It said that less than 1.5% of people who pay cash in is vitally important that they get proper advice and hand are actually ever prosecuted. Now, I am not we oVer to pay for that. Specifically, and Simon has suggesting that it is widespread by any stretch of the got the numbers, on assignments where the incoming imagination, but I am just saying that there are licensee is not actually transacting with us, they are motivating factors in small businesses. As I said, I buying a lease at some market value from a third was trying to defuse it from being regarded as the party, about one in three get through, so we turn norm to a position where unfortunately it happens in down two out of three business plans. a limited number of cases. Mr Townsend: On new lettings, where we are eVectively doing the selling of the agreement and the Q252 Anne MoVat: I am still concerned, and I want pub proposition to an individual licensee, one in four an answer either now or we need to get an answer get through, so there is actually a significant later, about the scale of the problem. You said that filtering-out process and that can happen at a variety you are not suggesting that it happens in the majors of diVerent stages in the process, whether it is at and you also said that it is a small proportion of the interview or whether it is at a point at which a estate. You have managed to give examples, the business plan has been submitted and is not SheYeld example and others, but I do not think acceptable. Under assignments, we have the right to anybody understands the scale of the problem. It refuse our consent to assign for somebody to sell the could well be that the Treasury is subsidising the remaining portion of their lease to somebody else. industry at a loss. We have the right to refuse consent if we do not Mr Tuppen: We will give you whatever information believe that the business plan is sustainable or that we can. The point I was trying to make is that in a the track record, qualifications or the financing of number of cases, and there are some specific the person buying that lease are sustainable. To examples which are pretty big numbers, we have make it very clear here about the diVerence between found that people have gone out of their way, assignment and new letting, over 50% of the people working often with wholesalers, to breach the who come into an Enterprise pub have actually paid conditions of their agreement, often buying somebody else, paid a capital sum to somebody else specialised equipment through that wholesaler to for the remaining portion of their lease for the rights ensure that the beer that they sell does not appear on to run that pub on the lease which is specified with our records. Now, that is quite a sophisticated thing the terms and conditions in that lease and they have to be doing. paid an out-goer for the right to be able to do that. That is a transaction done between two independent Q253 Anne MoVat: How much money does that cost people. We clearly have an interest in that to find out? transaction and we do our very best to make sure Mr Tuppen: Well, the particular incidents in that that transaction is correct and that the SheYeld— information shared between the parties has been complete. Q254 Chairman: I am sorry, but I am going to close Mr Kendall: From our perspective, which is very this down because we have got other issues broadly similar to what you have just heard, the fundamentally to take, so we have to move on to additional thing I would add is that I, for instance, those other issues. see all business plans associated with investments Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 38 Business & Enterprise Committee: Evidence

9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend and in my region we will do about 120 a year and, of Q258 Mr Bailey: I would like to pursue this at them, I probably see a very small number, four or greater length, but I am time-constrained, so I would five, that I think are pretty optimistic, to be honest, just make the general observation that, if the and they will go back because I do not want processes of submitting and the acceptance of the somebody to be encouraged to do something which business plans are so good, it does seem odd that I genuinely think is, quite honestly, not going to be there is subsequently such a level of dissatisfaction achieved, but the process of going through the there, and I think perhaps we will have some further business relationship manager, the area manager discussions on that subsequently. I have a couple of and also the operations manager, I think, does get to other points, first of all, to Punch. You operate a very realistic business plan. premium-rate telephone lines for tenants which Mr Townsend: The final point I would add is that, means eVectively that they have to pay for their for people who have no track record or no particular concerns, queries and discussions with experience in the industry who either wish to take a you. What is your comment? How much do you pub on assignment, ie, pay somebody else for it, or make from it? take a pub directly from us, following the 2004 Mr Thorley: Well, we do not. We removed those six inquiry where we said that we intended to take this months ago, so the answer is no, we do not and it is action, we have now fulfilled that action and it is a a standard-rate call. We have never had a premium- mandatory condition that inexperienced people rate call and we have never made any money out of coming into a pub must have their business plan the phone call itself, just to make it absolutely clear. signed oV by an independent financial adviser as well as a mandatory condition that they take legal advice Q259 Mr Bailey: Well, we have been told that. as well, so we make that very clear. It is not in our Mr Thorley: I think we have actually moved it to a interest to allow either naı¨ve business plans or over- local call to make it even less now. optimistic business plans which could, therefore, result in a business failure which, for all the reasons Q260 Mr Bailey: Brulines—there are complaints we mentioned earlier, acts in our very worst interest. that they are designed to measure beer and potential If I can make one final point on this idea of business fraud, but actually they fail to distinguish between failure, and Mr Hoyle was about to raise it earlier I water going through the process and the result is that think, it has been suggested to this inquiry that we there have been false accusations made against have no fear of a business failure or a closed pub tenants. Could I have comments from those who use because of some insurance policy that covers us for Brulines? two years’ loss of rent. That is a complete fabrication Mr Kendall: Yes, I can comment on that. You can and really we need to put the sword to that idea. actually measure the water that goes through, so that There is no insurance policy that can cover is not factually correct. Enterprise Inns for the loss of rent or the loss of income in a pub that has been closed down through Q261 Chairman: Could we have a technical note on a business failure or abandoned; that is a total that rather than spend time on it now? fabrication. It is an absolute cost to us and we will Mr Kendall: Yes. do everything we can to prevent that business failure. Mr Thorley: The simple answer, as hopefully most of us will be aware, is that beer is a diVerent density V Q256 Chairman: Is that true for Punch too? from water, so it actually measures the di erence in Mr Thorley: Yes. If I may say, to suggest that we can the density of the products, so, therefore, as you are seduce an individual or a small business to go and well aware, when you are cleaning a line, that is visit the pub, to then negotiate the terms of the lease, already factored into the volume that goes through to write a business plan, to review it with us, to then the flow meter. I am happy to provide a more agree the strategy and then to move into the pub and technical analysis of that. operate the pub under duress or some form of Mr Tuppen: Water very rarely put through the lines seduction is really quite extreme, and of course it during opening hours. does not happen. Q262 Mr Bailey: I think a technical analysis and perhaps some breakdown of complaints from Q257 Mr Bailey: I think, in fairness to the person tenants on this particular issue would be helpful. who submitted the evidence, the term ‘seduced’ was Lastly, there are clauses in some pub sales that mine. That is what, I think, was a reasonable premises cannot be used as a pub again after they interpretation of the evidence that was submitted. have been sold. How many have been sold with such Mr Tuppen: On one thing relating to that, we made it covenants? Can you give an estimate? very clear that we do have 90-day cooling-oV periods Mr Tuppen: I dare say that is directed at us. We tend and that was increased following the TISC 2004 to put these covenants in if we have an area that is from the then 28 days. We do think, given the current substantially ‘over-pubbed’. I think there is circumstances, given this perception that the all- agreement that there probably are too many pubs powerful pub companies are in this position of and the current economic climate is probably seducer, that this is in some instances too short and, making it less possible for the unviable to survive. therefore, we have increased the cooling-oV period Were we to have a pub for sale in a village or a suburb eVectively to six months for our retail partnership where there were already five or six pubs, it may be in tenancies. the interests of our licensees and indeed all the other Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

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9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend licensees in the area for this to be sold not as a pub. market it is very diYcult to sell pubs, but we are still This may well mean less money for us. In normal selling. If a pub really has no future, the best thing to circumstances, we will always be looking to get the do is to sell it for some alternative use. best price, but in some instances, and I would think it is probably about 70% of the pubs that we sell, we Q267 Mr Clapham: Just turning to the point you will seek to put in a restrictive covenant because, made a little earlier when you referred to a re- genuinely, we think these are pubs that have lived evaluation of your estate, did it indicate that you their life. We would never do that, for example, with have previously been over-valued? the last pub in the village. Why on earth would we Mr Tuppen: When this valuation was done, it was want to do that? Nor indeed would we ever be done on a pub-by-pub basis because you do not look allowed to by planning, I am sure, so that is pretty at the whole thing and value it on a spreadsheet, like straightforward. There are areas, and you will know a banker might, but we look at every single pub, and this from your own constituencies, where, frankly, if 2,500 pubs went down in value by an average of one or two pubs were turned into something else, it about 15% and the balance of 4,800 pubs went up in would probably be better for everything to do with value by varying amounts. I think the fact that a that area. number of pubs went down in value is a reflection of the diYculties being faced by the tail-end of the Q263 Mr Bailey: Could it possibly be because market where the smoking ban and all of the other certainly up until recently the residential property things we have heard about are meaning that these market was such that it was far more lucrative to pubs may well, for us, only ever be able to attract a knock it down and replace it with a housing lower rent, and the valuation would take due development? account of the fact that that rent would have to be Mr Tuppen: Well, we are selling it. We are not doing lower or indeed that the pub would have to be closed it ourselves, we are selling it and, as I say, often that and sold. may have resulted in our getting less money for it. Mr Bailey: I find that diYcult to believe, quite Q268 Mr Clapham: Given your reply to Mr Oaten honestly. regarding the market and the likelihood of some closures, what would you do there? Would you put them in a land bank, ready to sell for development at Q264 Chairman: Do you think it is really for you, as some time in the future? pub companies, to judge to what use these properties Mr Tuppen: We are tending to sell them on a regular should be put in the future? The market should basis. We are selling five or six pubs a week at the speak on that, surely. moment. They are generally being bought by Mr Tuppen: It is a fair point. I cannot argue with that individuals who have a particular plan. and, were it to become illegal for us to do that, I Occasionally, it will be a pub and, more often than would obviously comply. not, it will be a local developer who sees a property Chairman: I have a note here from the Herefordshire opportunity. We sold one last week as a dental and Worcestershire CAMRA about a pub I know in surgery, and there are a number of other uses. It is Malvern which is being sold with a restrictive not in our interest to store them up, to be honest, covenant at present, not, as far as I know, by you. It and, when we decide we are going to sell them, we should not be sold with a restrictive covenant, it is sell them. wrong, but the owners of that pub have deemed that it will be and that acts against the interests of the community. That should be for the market to judge. Q269 Mr Clapham: It was interesting that you said you would not close the last pub in the village. Now, my constituency is a rural constituency, and I am not Q265 Mr Oaten: But is it in your business plan for saying that they are yours, but over the last couple the next two or three years to see a gradual reduction of years we have seen, on my west side, a good in the number of pubs, to pick up on the very point number of pubs close down in villages where they that you made that there might just be too many have been the last public house, so there is— pubs? Mr Tuppen: I would probably share your view that Mr Tuppen: I think you made the point when you that is an absolute tragedy because the pub is were speaking to the gentlemen from the trade probably the last thing remaining for any sort of associations, that there may well be 5,000 or 10,000 community focus in that village. too many pubs in this country. Q270 Mr Clapham: On to the rent situation, when a Q266 Mr Oaten: So is it in your business plan to help prospective tenant is moving into one of your public that natural reduction happen? houses, do you divulge to them the previous sort of Mr Tuppen: We will be looking to sell any pubs that performance of that public house? Do you tell them we do not see as being viable. What is the point of about the bankruptcies, if there have been any having a pub where somebody may over- bankruptcies? Do you tell them about the enthusiastically take it on only to fail? If we just performance of the last person in that public house? cannot see the possibility of a business plan coming Mr Townsend: I am almost sure that we would not together that could give a proper living to somebody, divulge the personal information relating to the why on earth would we do that? Now, your point prior occupier of a house and the personal financial about the residential market is fair and in the current situation, but the trading history of the pub, Processed: 07-05-2009 20:10:34 Page Layout: COENEW [E] PPSysB Job: 420679 Unit: PAG1

Ev 40 Business & Enterprise Committee: Evidence

9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend absolutely. We will share with them the information tell you that it costs about £500. It is a that we have available, and that is typically the sales straightforward legal cost to remove that clause of products that we make into the pub and the share from the agreement by deed of variation for ever. of gaming income that we may have enjoyed from That can be done by anybody at any time merely on the pub. We do not have access to the pub’s books paying the cost associated with doing it. I think one in the circumstances of either a new let or indeed an of your earlier witnesses is actually doing that at the assignment. As has wrongly been suggested to this moment following an arbitration case that we had inquiry on an earlier occasion, we do not have access with them and he requested the removal of the to the tenant’s books. upwards-only rent review clause and he has agreed Chairman: Enterprise are doing an awful lot of the to pay the £500, and that is fine. Any lessee, on answering and Punch not so very much. renewal of their agreement, can also renew on to a new Enterprise agreement with no change to the Q271 Mr Clapham: Yes, I am coming to Punch in commercial terms at all. Again, completely contrary one second, Chairman. Mr Thorley,on that question to the evidence that was given by an earlier witness of divulging to the person who is coming in the suggesting that we try and negotiate wider previous financial performance of the property, do conditions in return for removing, it is absolutely not you do that? the case. There is no right for us to change the Mr Thorley: Yes, we do and not only do we provide commercial terms of the lease on renewal, but the volumes that we have provided, but we will also somebody can move from a lease with the clause in provide, and we do this at the same time as a rent it to a lease without the clause at no cost, and review, a breakdown of our calculation of the rent, people do. and it is in Appendix 3 in our submission, so you can see a clear breakdown of our expectation in terms of the volume, the gross profit on each product line and Q275 Mr Clapham: Mr Thorley, can I just ask you how the rent is calculated. the same question? Mr Thorley: All of our agreements, the new agreements are in plain English and do not have an Q272 Mr Clapham: Given what we have said about upwards-only clause in them, but there are some the re-evaluation, have you had a re-evaluation legacy agreements that will have it and I can happily carried out of your estate or do you intend to do undertake to the Committee now that, if anybody that? wishes to have a deed of variation in relation to Mr Thorley: We did as of the end of August and we removing that for ever, I will happily make sure that actually reduced the value of our estate by just under we instigate that. Our view is simply that, as with the £300 million, really more focused on the part of the estate which, we think, is struggling where the turnover of leases, that will be removed anyway, but valuations are not sustainable. it is a very small number and, if there are any, I am happy to make that undertaking just to make it absolutely clear. Q273 Mr Clapham: So that is knocked on to rents? Mr Thorley: Well, across the board, as we have already said, we have granted over 800 rent Q276 Mr Clapham: It is interesting that you both concessions to reduce rents. No doubt, you will want have said, “As the re-evaluation has come about, to talk about rent reviews, and again more than a we’ve seen downward rents, rents coming down”. third of our rent reviews in the last year have either Do you pursue a policy at all now to ensure that your seen the rents staying the same or going down, so the tenants are in receipt of a living wage? answer is that we are trying as best as reasonably Mr Tuppen: Yes, absolutely. Whenever we look at possible to reflect the conditions in the marketplace. the potential for a pub, we always consider that there is no point in letting that pub at a level where the Q274 Mr Clapham: With regards to the rents, and tenant cannot survive, and we have made that point this is a question to both companies, are you sort of on a number of occasions, I think. There is changing any of the clauses that refer to upwards- absolutely no point in our maintaining a pub where only rent reviews? Have you still got upwards-only it is impossible for the tenant to earn a decent living. rent reviews? Mr Townsend: I think our position on upwards-only rent reviews is very widely known. We do not enforce Q277 Mr Clapham: Finally, given that you say you any upwards-only rent review clauses in our do not have access to the books, do you encourage business. There is no upwards-only rent review your tenants to actually use given accountants or clause in any Enterprise agreement that has been solicitors? issued since 1997 and, in every agreement that we Mr Townsend: We do. We encourage hugely in all have acquired since then, our Code of Practice cases and we have actually made it a mandatory overrides any clause within the lease, so, just to be condition of our new tenancy agreements, that very clear, we do not rely on an upwards-only rent actually it is a requirement of the agreement to enter review clause in any circumstances. Now, there are into professional services, utilising a trade agreements which have that clause within them and accountant, a known trade accountant, an that clause can be removed. There is a legal cost accountant with experience in the trade, a stocktaker associated with that, I think one of the gentlemen and other statutory regulatory services. We actually from the trade associations mentioned it, and I can require those to be taken on by the tenants. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business & Enterprise Committee: Evidence Ev 41

9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend

Q278 Mr Clapham: Mr Thorley? talking about in profitability terms for Punch is Mr Thorley: Yes, in our introduction to the new based on the average, not necessarily on that of our agreements on the first page, it sets out all of the customer. In relation to the results in 2008, actually advisers that should be needed for a pub and in we estimated that the customer profitability this year relation to all new agreements they use a company had fallen and fallen by around £2,000 per annum in called Milestone which provides accounting services terms of the income, so, therefore we are reflecting specifically for pubs and again on a very favourable the conditions in the marketplace. The conditions in rate to make it as competitive as possible because we the managed marketplace are slightly diVerent in do not want to burden them with undue costs. that there are significant additional cost pressures which are aVecting the managed sector which can be Q279 Mr Clapham: So, if you have got pubs in my mitigated by our leasing and tenanted operators. constituency out on that west side, I can tell my landlords and landladies that rents are coming down Q281 Mr Binley: Chairman, I think it is fair that we and they are going to survive? give Mr Thorley the chance to write to us because the Mr Townsend: We can make it very clear that rents figures are so out of kilter. should be at the right level. It is completely Mr Thorley: I will happily do that. counterproductive for us to ‘over-rent’ a pub on any occasion. The primary objective is to make sure that Q282 Mr Wright: Going back to the wet rents issue the rent is the right rent for that pub and a again, we have established that the pubcos do lease sustainable rent for that pub, providing the lessee their pubs free of the tie, but can you just tell us what with a sustainable living. proportion of your business is free-of-tie? Also, what Mr Thorley: I would suggest that, if any of them diVerential is there between rents? I think, Mr were dissatisfied, then they should speak to Dennis Thorley, you pull in £20,000 for a free-of-tie with an Y Gri ths at the Miners’ Rest in Barnsley just by the £8,000 rent and obviously £10,000 for the wet rent hospital, who is a personal friend of mine. He is and £2,000 for the machine. Would that be the sort Chairman of the Federation of Licensed Victuallers of 40% mark? Would that be possible? Associations, I believe you know him, and he will Mr Thorley: Yes, I have actually given the happily vouch for the fact that we do try to be as breakdown in our submission between the diVerent honourable as possible. Occasionally, we make income streams, so it is roughly that. I can refer you mistakes, but the object is, when we do make to the page. It is actually in the summary on page 2. mistakes, to try and rectify those. It is 44% rent, 50% beer margin and 6% machine, so that is pretty close in terms of the numbers. We have Q280 Mr Binley: I have given you notice of the a couple of hundred pubs which are leased on a free- question actually because I asked it in the earlier of-tie basis and they reflect the circumstances of session, but I did make the point that your statistics those pubs. For example, we have some pubs which suggest that the diVerence between leased pubs and are currently run as restaurants where the pub managed pubs, and I have already made the point building is being let to an operator who is running it about the diVerence in size of business, that the as a restaurant. We have a Michelin Star restaurant leased pub is, on average, about 11.5% of the take of in Glasgow, and we have no Glasgow MPs here, but the managed pub, but I said that the diVerence the Chardon d’Or, which is in Glasgow which some between 2006 and 2007 with regard to take is that of you may have been to, is actually a very high-class take is up in tenanted pubs by 6% and in managed restaurant. Now, beer, as a constituent part of that pubs by 10%, but the profitability has shown a 5% business, is very, very insignificant and, therefore, it increase in the tenanted estate, but a 20% drop in the is not necessarily sensible to lease it on a tied basis, managed estate. Now, this suggests to me that either so we will take that into consideration where it is your DMs or your area managers are a total waste relevant in terms of the strategy of the pub. of time or you have got some special costs in there that I do not understand or you have had a massive Q283 Mr Wright: Mr Tuppen, do you have anything improvement with your tenants in your tenanted to add? estate. My concern is that, if this is used in Mr Tuppen: The ratios are very similar. We have very discussions on rent reviews, then we do need to few free-of-tie pubs and they are in fact pubs we V understand that di erence because it is an important inherited in transactions in the past, so our absolute piece of evidence. commitment is to the tie because we believe in it as Mr Thorley: I accept that. I do not recognise the the best and fairest way of running decent tenancies. specific numbers, but I will happily deal with the specific questions where those numbers came from V separately rather than go into the detail. What I Q284 Mr Wright: Do you o er a potential lessee the would say though is that in terms of the profitability option of a free-of-tie or a tied lease? of the leased and tenanted pubs, the number which Mr Tuppen: No, we are not a free-of-tie estate. We I do recognise, the 5% increase, reflects the fact that are a tied and leased tenanted estate. over the course of the last few years we have sold more than 2,500 pubs as part of the evolution of our Q285 Mr Wright: Mr Thorley? business. Verymany of those pubs have continued to Mr Thorley: We can give them a free-of-tie rental bid stay as pubs, albeit they are, on average, smaller than if that is appropriate for the business plan. the pubs that we retain, so the number that we are Invariably, it is not. 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Ev 42 Business & Enterprise Committee: Evidence

9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend

Q286 Mr Wright: Do you make that decision reviews every year where we go out around the town, yourself? we look at the competition, we look at pricing, we Mr Thorley: It will be the Regional Director, see what we can do to improve the pub and then, if although he would need approval from his anything goes wrong, I ring her up and she sorts it Operations Director. out”. That, to me, is almost a perfect definition of a regional manager. Q287 Mr Wright: So, if a potential tenant came to you and said, “Look, I don’t want this tied, I want Q290 Mr Wright: I just think that is an add-on cost this free-of-tie”, would that be oVered to him or to a lot of the tied pubs which is probably would you say, “Sorry, but we’re not going to do it unnecessary. I was the secretary of my club for many, this way because we can see the potential for many years and we were free-of-tie. We negotiated ourselves”? the barrelage agreement with the discounts and Mr Thorley: Well, I think the answer is that we everything else, but I could just phone them up in an would look at the circumstances of that pub and if it abstract way and say, “I need to talk to the was suitable for that type of operation. Remember, Manager”, and they would be there, free-of-tie. I as we were discussing earlier with Mr Bailey, we do would ask them, “Are there any courses that we can see the business plans and we get an idea of what is send our bar manager on?” “Yes, you can”, and happening, what is proposed in that pub and that probably free of cost or at minimal cost, so I do not will give us an idea. see where the diVerence is and I just think it is probably an add-on cost to the tied bars which could Q288 Mr Wright: You have already mentioned the be saved and could probably even save a number of element of training that is given free of charge to tied these pubs from going under if they had that tenants, but can you just tell us what is the cost that flexibility to carry out their own training. Invariably, the pubcos would bear for the tenants which the many of the people that come from within the tenants themselves would otherwise have to pick up industry itself probably do not need to take up that if they were free-of-tie? What would be the overall element of training. cost of that? Mr Tuppen: It is not just training, there are so many Mr Tuppen: Do you mean for that particular other things. What we can do, and I would be very training course? happy to put this in a letter to you afterwards, are, for example, special buying deals where our licensees, because they are Enterprise licensees, at no Q289 Mr Wright: Not just for that course, but kick-back whatsoever to us get things more cheaply overall. In other words, what is the diVerence than they could otherwise get them, so there are real between a tied pub and a free-of-tie pub in terms of benefits there. There are a whole series of things, and the benefit that you would suggest that you give to I would draw your attention again to the 2004 TISC them in terms of training and the whole package conclusion which says, “The tie usually balances the which they themselves would have to pick up if they costs and benefits available to tenants and the were free-of-tie? existence of the tie provides demonstrable benefits to Mr Townsend: I am sorry, I am not sure I have both tenants and customers alike”. I would very completely got the question. We clearly provide an happily either find the appendix that went with that array of services and I think the Punch gentleman comment or perhaps give you an update to it so that described the detail of some of the services that we you can get yourself more comfortable that there is provide. That is the whole emphasis of our business, real value because, I agree with you, if there were no it is what we do to try and help pubs be successful, value added, then the tie principle would be less so, whether you have got the regional manager as a tenable. business adviser with the investment we have put into regional managers in the last couple of years and the investment we have put into systems and Q291 Mr Wright: Mr Thorley, did you want to add? tools to enable them to spend more time in pubs, we Mr Thorley: I was just going to ask actually, did you have got 30,000 quality business reviews which have negotiate that arrangement with a single brewer or been undertaken by regional managers in the last with a wholesaler? year and 8,000 property reviews by the regional property team. Now, we believe that is a very added- Q292 Mr Wright: With a single brewer. value service. There will be some protagonists to the Mr Thorley: I think it is important to notice the tie who will say that the regional manager adds no diVerence, and I refer back to the point about the value. I am sorry, I cannot argue that with them on value of items. Needless to say, that single brewer an individual basis, but we passionately believe in would not have been willing to provide its the tie and we believe that the services that we can competitors’ products. We are. It would not have provide can help pubs be more successful, and been prepared to give a guarantee of supply for the clearly we are going to continue to try to do that. remaining life of your tenure as secretary or for the Mr Tuppen: In numbers terms, we provide training life of the club. We are for the life of the lease. It and we provide a free rating service which would cost would not necessarily give you complete freedom in several hundred pounds, so it is this business terms of your stocking. We do. Taking the example relationship which was described to me by a licensee, of the top five beers in the UK, and in fact I have one of your constituents, who said, “My Regional actually got the top six products, the number one ale Manager’s fantastic. We have two superb business is Tetley’s supplied by Carlsberg, the number one Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business & Enterprise Committee: Evidence Ev 43

9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend lager is Carling supplied by Coors, the number one recognise that at all, the fact is that in all Enterprise cask is Greene King IPA supplied by Greene King, agreements that are receiving a discount, and that is the number one is Bulmer’s Strongbow now about two-thirds of the pubs in the Enterprise estate, owned by Heineken, the number one premium lager the discount that is awarded to the pub goes up is Stella supplied by InBev and the number one exactly in line with the increase in the wholesale is supplied by Diageo. Now, for an price. individual pub buying 200 barrels of beer a year, trying to deal to get the best market position which Q294 Mr Wright: What would be the eVect if the would logically be the number one products in each V beer tie were removed? category, he has to deal with six di erent suppliers or Mr Thorley: I have already said that, sadly, there he has to sub-optimise and deal with a wholesaler. V would be some international brewers no longer UK- We supply those six and another 250 di erent beer based, and remember that 80% of our beer sales in supplies in addition to that and a whole range of V V the UK are still controlled by four major operators cask ales. Now, that is the di erence that we o er in all of whom are foreign organisations, and they terms of just the beer supply, so certainty of credit, would simply redirect their eVorts into oV-trade certainty of terms, no minimum purchase promotions, their marketing eVorts, and you would obligations and guaranteed delivery on a 24-hour see a significant reduction in the amount of inward basis, six days a week, so we do provide a very investment into pubs by the pub companies because significant service and we have put the infrastructure we would have no incentive and we would have no in. If the tie went, it would not be the individual pubs connection with the trade of the pub anymore. As I that would benefit, but, sadly, there are executives in said earlier, the benefit of the wet rent, as some Copenhagen or in Amsterdam or in Golden, people have called it, is that it gives us an immediate Colorado or in Sa˜o Paolo who would be sitting indicator of the performance of the pub and we get there, saying, “Now’s our chance to reap more profit an immediate change in our income streams, not from the pub industry”, and they are not going to something that can be changed on a monthly, plough that back into the individual pubs, I am quarterly or annual basis in the same way as the afraid they are simply not, whereas we have spent rents; it is very much more flexible. £300 million on our pub estate in the last five years. Mr Tuppen: We are often accused of just being property companies. The reality is that we have a Q293 Mr Wright: I can understand what you are total interest in the performance of the pub, so we saying there, but really it gives the independence to invest in its success and we want it to be successful the free-of-tie to negotiate the barrelage agreement. so that it can sell more beer and we can all make Admittedly,although the products are limited within more profit. Were the tie to be removed, we would the confines of that brewer, you can actually get a indeed become just straightforward property significant discount. While we are on the question of companies and, for a start, one would not see the discounts, as I said in the earlier session, the fact anything like the £9 million of support that we gave is that prior to 2004 it was roughly a 50-50 split in to our licensees in the past year, and Giles gave terms of the discount, ie, the lessee would get 50%, similar amounts. We have an interest in the success £50, and so would the pubcos. Since 2004, since the of the pub that is exactly aligned with those of our increase in the products which have gone up by licensees and, whilst that has been under attack roughly 50% and, therefore, the discounts recently by people who would like to see the themselves have gone up, the lessees are still getting agreements to which they signed up changed, the their £50 and the other money goes on, so, in other reality is that we see this as something that is for the words, why has the 50-50 split disappeared in the last long-term benefit of pubs in this country. The reality four years? also is that, if the tie were removed, there would be Mr Thorley: Well, it has not because an increasing even more pub closures and there would be a number of leases which have been granted since 2004 significant reduction in choice for the consumer. have increased discounts. We have three broad lease agreements in addition to free-of-tie. We have pubs Q295 Chairman: I do find the evidence you have just that are on high discounts of £95 a barrel plus, we given on discounts confusing because it contradicts have pubs on a medium-sized discount of £45 a almost all the other evidence we have had, and we barrel and we have pubs on no discount at all. Each have heard particularly that supermarkets are of those is available to all pubs, so, therefore, there passing on these discounts to consumers and, are certain circumstances when one structure of the therefore, are undercutting pubs, which is a matter of compensation benefits one operator and there are some concern to all of us who care about the future diVerent structures for other operators. We can of pubs. The Association of Licensed Multiple provide that data and it is reflected in the price, and Retailers have given us completely diVerent evidence it does reflect the level of discount because the level about discounting policies from the pubcos, so how of discount will determine the gross profit made on am I to understand this discrepancy in fact? each product line and that will work out to the Mr Tuppen: We have been rather pilloried over the calculation of the rent, and that is shown clearly in last few months and the arrival of the Fair Pint our submission in Appendix 3. Campaign and their sponsors Messrs Farron and Mr Townsend: I would add that, whilst I do not Mulholland have launched huge attacks on our recognise your wholesale price increase up by 50%, business model. We are quite thick-skinned. which I think is what I heard, I simply do not Enterprise is a corporate entity. 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Ev 44 Business & Enterprise Committee: Evidence

9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend everyone else in business, it is finding times pretty declined dramatically, and what we have tried to do tough. This is a tough world, but Simon and I are with the machine tie is to protect our customers in pretty thick-skinned. providing machines at eYcient rates and providing the best support to make sure that they have the best Q296 Chairman: But is it not a fair point that the machines. Some of the statistics that have been Association of Licensed Multiple Retailers give us quoted are very misleading. The average machine completely diVerent figures on discounts? rent for a machine in a pub ranges from £70 a week Mr Tuppen: I was about to give you a solution. I down to £20 a week. Now, you can understand that V would like to invite all of you, even those who have that is a significant di erence and there is a reason V left, to come and spend just a couple of hours in one why the rent is di erent and that is because the £20 of our regional operations meetings. Most of all, you machine is rubbish and the £70 machine is very good would meet the eight human beings who are the in terms of its cash-in-box take. What we try to do is regional managers who are so roundly pilloried the maximise the number of our pubs that have the whole time but who spend their lives trying to help betting machines at the best rates and that is the pubs. I feel really sorry for them, having constantly benefit of being able to lease 13,000 machines to listen to the carping about their behaviour. I can compared to two for an individual pub. assure you that, whilst we all make mistakes, these guys are massively committed to our business. I Q299 Mr Binley: My first question is about the pre- would invite any of you to come and spend a couple arbitration process because I want to talk about of hours in one of our meetings and they will take arbitration and that is why you have got an AN-DN you through all of the details of the discounts. We structure actually in most instances. Why was it, can show you the discounts if you spend time with when we have complaints from tenants, 32 came us. from Enterprise and only 12 from Punch and yet Punch have got more public houses than you? Presumably, your DN advice structure is much less Q297 Chairman: Okay, we will take you up on that. V Just very quickly, ties on soft drinks, amusement e ective or what is the cause of that? Mr Tuppen: Well, rather than deal with the problem, machines with prizes and insurance, can you justify V the ties on those three areas? I would like to o er the solution. Mr Tuppen: If we start with insurance, the commitment that we make to our pubs, and I can Q300 Mr Binley: No, you answer my question first. think of one in particular that gets flooded twice a Mr Tuppen: Well, 32 and 12, those are not material V year by the River Severn, in your constituency, I di erences. guess, who would not get insurance in diVerent circumstances, is provide to provide the best-quality Q301 Mr Binley: Well, it is three times as many. insurance to all of our pubs and charge a fair price Mr Tuppen: But the solution lies in support, which for it. If any licensee can demonstrate that he can get we give unconditionally, for the BII proposal to the same cover at a cheaper price, we give him his produce a £1,000 fixed-cost professional arbitration money back, so we could not make a greater system. Now, we support this entirely and we are commitment than that. They happen to be tied. We working with them because, I do agree with you, if have to have our properties insured and we go out of you are to criticise the arbitration process, we can our way to get them the best possible insurance. If aVord to pay £20,000 if we really feel strongly about they can get it more cheaply, then we give them the it and the licensee cannot, and we have to change diVerence, and I think that last year, out of the entire that process. estate, the number was 46. Mr Townsend: That is 46 queries in relation to the Q302 Mr Binley: I am going to stop you, Mr Tuppen, amount that we were charging, of which four were because you are not answering my question. The then reduced in price. point I was making about the DN structure is that you avoid arbitration at any cost at all. Q298 Chairman: So you have made the oVer to never Mr Tuppen: Well, absolutely. knowingly be undersold, the John Lewis-type oVer, but I should not talk about John Lewis, should I! Q303 Mr Binley: What I am saying to you is that You have made the point on insurance, but what yours does not look very good from the complaints about the amusement machines, Mr Thorley? we have had. Will you look into that and give us that Mr Thorley: The amusement machine market is in a undertaking? very dire state and that is, sadly, through no fault of Mr Tuppen: I will. our own. It is as a result of the introduction of fixed- odds betting machines which were blatantly Q304 Mr Binley: Will you come back to us and give introduced by other operators against the law. They us the results of your investigation because you have challenged the Treasury or the Government to got some work to do here? eVectively deal with them and instead they were Mr Tuppen: Will you give me the list of people? retrospectively legalised, so you now have a situation where you have bookmakers with £500 jackpot Q305 Mr Binley: I am not sure. I leave that to the machines which did not exist in the past and the pub Chair. industry as a whole has suVered. The consequence of Mr Tuppen: If you can give us the names of people, that is that the number of machine operators has then we can look at it. Processed: 07-05-2009 20:10:34 Page Layout: COENEW [O] PPSysB Job: 420679 Unit: PAG1

Business & Enterprise Committee: Evidence Ev 45

9 December 2008 Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend

Q306 Chairman: Some of it is confidential and some Q311 Mr Binley: Can I finally ask, what happens to is not. a tenant who wants to surrender his lease and what Mr Tuppen: We are very happy to do it on a case-by- penalties do you include in the lease in that respect? case basis. Mr Tuppen: That is an interesting one. It would be very much on a case-by-case basis. We will take a Q307 Mr Binley: There is an issue there which, I am very diVerent view of someone who pops the keys pleased to tell you, you need to deal with, quite through the letterbox and tries not to be found and frankly, and that gives me some pleasure. Now, how we will pursue them to see whether we can recover much do arbitration cases cost and who bears the the costs incurred while we get the pub reopened. If cost you have answered. What additional someone is in a good relationship with us and they information is released at arbitration from you? Are say,“Look, frankly,this isn’t working”, we will work you holding stuV back so that, when it gets to with them for them to move out of the pub to assign. arbitration, you give nothing of that kind? Can I ask, how many publicans take up the cooling period Typically, if that process works well, it will not cost which is a part of the going-in process? them anything because we will be working with them Mr Tuppen: The 90 days we have now increased to and helping to find someone to take the pub on. If 180 days with our new tenancy agreements. they do not take that view, then of course we are in a much more diYcult situation because we are going Q308 Mr Binley: That is interesting, that is good. to end up with a shut pub that could be shut for six Mr Tuppen: That is again a commitment, just weeks and we would have the security costs, recognising at the time of the last Committee that it someone will pinch the tiles and, before we know was suggested that 28 days was a bit short and we where we are, we have got costs, so our plea to agreed with that then and we moved straight to 90 tenants, and we do not have to make this to tenants days, so there was no question about that. We now because the vast majority of them know this already, have a retail partnership tenancy where you can give is, “Work with us and we will help you in diYcult notice at any time within the first six months. circumstances”. Anyone who has any uncertainty at all can, in the Mr Thorley: As always, there is a sad diVerence first instance, go on to that short-term tenancy. between cannot pay and will not pay and there is absolutely no point in our pursuing cannot pays and Q309 Mr Oaten: Do Punch do six months or will you we do not. Will not pay, that is a diVerent matter and move to it now? we do reserve the right to pursue if we have evidence, Mr Thorley: We do not, but we will happily move to but again it is very,very much on a case-by-case basis it. It is just worth noting that I was just asking my and specific to the individual circumstances. colleague, Mr Kendall, how many had actually served notice under their tenancy and his answer is— Chairman: Well, I am afraid there are many other Mr Kendall: None. questions we would have liked to ask you at greater length and I would have liked to go through all these Q310 Mr Oaten: So you will move to six months? individual complaints by individual tenants one by Mr Thorley: Yes, we will move to six months, no one, but we cannot do that. You have been very problem at all, but, as we have said, none has or very, generous with your time and we have run well over, very few actually ever get exercised which should appallingly over, but I am very grateful to all those, suggest that at least we do something right initially including the shorthandwriter, who suVered this as anyway. well! Thank you very much indeed. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [SE] PPSysB Job: 420592 Unit: PAG1

Ev 46 Business and Enterprise Committee: Evidence Written evidence

Memorandum submitted by the National Parliamentary Committee of the Guild of Master Victuallers

1. Beer

Costs to Pubcos Pubcos are able to negotiate substantial discounts from their suppliers because of the influence in the market due to their size. For instance Enterprise Inns and Punch Taverns own in excess of 15,000 licensed premises which represents more than 25% of the UK pub market. These pubs are in the main operated by individual tenants and lessees. This situation is compounded by the managed house estates also owned by the Pubcos and their buying power with a distinct advantage over the individual tenants and lessees all operating in the same high street.

Costs to tenants and lessees Due to Pubcos strict enforcement of their supply agreements with both tenants and lessees which prohibits them from obtaining their products on the open market or from suppliers of their choice they are bound by the price list imposed by the pub owning companies. This price list does not reflect the large discounts obtained by the pubcos from the Brewers. Where large volume sales result in a more beneficial discount to the tenant or lessee it is oVset by a higher level of rent which negates any advantage gained.

Guest Ales The Guest Ale provision in the Beer Orders, enabling tenant and lessees by right to stock these products, have in most cases been eroded by the Pubcos by arrangements forced on licensees in exchange for discounts. These arrangements are reflected in any subsequent rent review.

2. Rent On review rents should be subject to any environmental changes in and around the licensed premises which adversely aVect the profitability of the business. The unfairness of the upward only rent reviews do not take in consideration these changing circumstances which in most cases are outside of the control of the licensee. In commercial trading practises there is no place for upward only rent reviews and therefore they should be abolished. Pubcos should be open with their tenants about the way in which rents are calculated.

3. Restrictive Practices by Pub Owning Companies In the case of AWPs (Amusement with Prizes Machines), Juke boxes, Video machines and Quiz machines, the licensee is again restricted from a choice of supplier by having to adhere to the Pubcos list of preferred suppliers of these machines. The preferred suppliers rental arrangements with licensees are in excess of those that can be obtained in the open market. The reason for this is because the Pubcos receive commission on the inflated rental charges levied by the suppliers. This general practice is further compounded by their taking of a high proportion of the total machine income. In the case of pool tables and snooker tables that are not rented from the preferred supplier, the Pubcos levy a ground rent to oVset their loss of commission. Where the tie exists it should be removed.

4. Building Insurance Licensees have no choice in the selection of building insurance providers but are restricted to the company’s nominated insurer. The restriction results in higher premiums than can be otherwise obtained due to the company’s commission arrangements with the nominated insurers.

5. The Tie—A Time for Review There has been no substantial review of the Tie since the 1990’s when the spotlight was on Inntrepreneur Pub Company. At that time the focus of attention was on whether the Tied Lease complied with the “Block Exemption” requirements under European Competition Law. In particular, attention focused on whether the Tied Lease provided the tenant with any “special commercial or financial advantage” (SCOFA). The basis of the Tie in early 1900s meant that all beer products supplied by the tenant had to be purchased from the landlord or from the landlords nominated supplier and at the landlords standard price. This was subject to one proviso ie. that the tenant could, at any given time, stock one “guest” ale of the tenants choice and purchased from a supplier of the tenant’s choosing. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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The nature and scope of the tie has changed dramatically since the late 1990’s, either through changes introduced in the terms of new leases granted by Pubco landlords or through financial incentives. The guest ale concessions have been removed from leases granted in the late 1990s and onwards. In addition many existing tenants were oVered financial incentives to give up the guest ale. The tie provisions in leases have been extended from beer only to “beer, and alcopops”. Some Pubco landloads have introduced a “full tie” in new leases. AWPS and other gaming amusement machines have been brought into the scope of the tie provisions. Tenants must now use the landlords nominated supplier for such machines. In addition, the net takings, (which formerly belonged to the tenant absolutely) must now be shared between the landlord and the tenant. Increasing public concern over alcopops and increased consumption of soft drinks in public houses has resulted in the tie provisions being changed yet again. Alcopops are now going out of the tie provisions and are being replaced by soft drinks.

Other issues

The National Parliamentary Committee of the Guild of Master Victuallers has restricted its submission to the issues that the Business & Enterprise Committee intend looking into but it is aware that there are other issues that are of concern to licensees. It would like the Committee to consider other important issues such as: An agreed accredited National Code of Practice to apply to all Pubcos. Transparancy in all dealings between Pubcos and licensees. Independent fully binding complaints procedure panel. AVordable arbitration. 29 September 2008

Memorandum submitted by Brian Jacobs Further to my original submission to the Trade & Industry Select Committee in 2003–04 there has been no improvement in the financial relationship between Pubcos and Tenants and in fact that submission could be reissued today virtually without amendment. The recommendations of the Trade & Industry Committee fully satisfied the requests for improvements contained in the submissions, with the exception that it was envisaged that the supply tie should be removed because of the intransigence and disingenuous practices of the Pubcos. Although the Business & Enterprise Committee has tabled specific questions the prime core issue is that the tied tenant should not be financially worse oV than if they were free of tie. Adoption of this principle would allow tests to develop and exist that would go towards ensuring that the tenant has a liveable income and the consumer a fair price. Consider the following. 1.1 The Pubcos having paid excessively for their acquisitions, or overvalued their pub estate, all with a view to maximising their borrowing placed themselves in a position which does not allow them the financial flexibility to observe the Trade & Industry Committee recommendations; this is probably the driving reason for their subversion. 1.2 Although implanting statutory remedies today to support the Trade & Industry Committee recommendations may seem to be a solution it has to be recognised that the Pubcos have squandered four years when they could have put their house in order but refused to do so. 1.3 The four years of avoidance and pure bloody-mindedness by the Pubcos has had a dramatic and disastrous impact on the Pub trade. The impact of some of these issues are examined in greater detail below. 1.4 Enforcement of Recommendations 144 and 145 coupled with the removal of all supply ties including machines, and the total removal of all Upward only rent reviews is the only practical remedial step which requires the least statutory requirement. 1.5 The eVect on trade of 2.4 above would be to remove the anti-tenant and anti- consumer eVects created by the Pubcos. Whole detail would permeate through the rent construction and the tenant structure and thus create transparency. 1.6 The BESC should not be deflected, by concerning themselves about the possible financial impact on Pubcos, from securing the core issue which would protect the existence of the British pub, the tenants and the consumer from the existing malpractice. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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2.0 Consider the Major Problems that Exist for the Majority of the 25,000 or more Tied Tenants 2.1 Tenants pay excessive prices for the beers, and in some cases for wines and spirits as well. 2.2 The rent, relative to real profitability, is excessive due to the fact that Pubcos consider that the principle of competent tenant should in fact be interpreted as a tenant who is exceptional and capable of turning back the tide of history to perform at a substantially higher level of profitability. This has been achieved by Pubcos overestimating turnover and gross profits, underestimating operating costs and more importantly ignoring and excluding the available open market discounts, denied to tenants, as well as the failure to account for their hidden share of income extracted from the AWP machines. 2.3 Currently the tenant of a tied pub is substantially financially worse oV than if they were free of tie primarily by due to the failure to properly account for open market discounts denied to the tenant. This unacceptable practice has been perpetuated by RICS and embraced by Valuers and Arbitrators. In Dodds v West Register (Public Houses III) Ltd. Cite: [2008] All ER (D) 246 (May) Court: Chancery Division] the High Court has recognised the total failure of an arbitrator to take account of discounts and the importance of making a proper adjustment. The Judge concluded: ……. the absence of the claimant’s “open market discounts” amounted to a serious irregularity pursuant to section 68(2)(d) of the Act, resulting in substantial injustice to the claimant, which had arisen as a result of the arbitrator’s failure to address that entry in the claimant’s trading accounts. 2.4 The Pubcos control the usage of AWP operators, take a royalty per machine from those operators and also take a share of the AWP when it is emptied. The Pubcos fail to account for that share when calculating the rent. The T&ISC recommended: (i) 129. The machine tie improves tenants’ takings from amusement with prizes machines (AWP). However, as free of machine tie tenants retain 100% of these takings as income, while tied tenants by pubcos’ own admission receive an average 50% of these takings, it appears from the information the pubcos themselves submitted that in many cases free of tie tenants make more money from their second tier machines than tied tenants do from their more up-to-date models. In our opinion, pubcos do not add suYcient extra value from their deals to justify their claims to 50% of the takings from AWP machines. We remain unconvinced that the benefits of the AWP machine tie outweigh the income tenants forgo and we recommend that the AWP machine tie be removed. 3.5 Rents are RPI index linked, by the Pubcos, ensure that there is an annual interim increase in rent. RPI adjustment is Upward only. At current rates of RPI this represents a 20–25% increase in rent over five years. Most new leases issued by Pubcos contain this ongoing clause which is both unacceptable and does not reflect the Trade & Industry Committee recommendation: 151. We commend Pubcos which have already removed upward only rent review (UORR) clauses from their agreements. We consider this best practice within the industry and we call upon those Pubcos which have not already done so to remove such clauses as soon as is practicable. 3.6 The Pubcos not only ignore the Trade & Industry Committee recommendations 129, 133, 144, 145 and 151 they actively subvert the Trade & Industry Committee through adopting the BBPA Code of Conduct. By ignoring Recommendations 144 and 145 Pubcos avoid the detail of transparency which would reveal their disingenuous assessments. The Trade & Industry Committee recommended: 144. The industry could and should establish clear guidelines for the valuation process. Where they do not already exist, new national guidance for rent calculation should be compiled, and disclosure rules clarified. The profit assessment method of calculating rent should be carried out in accordance with national accounting standards and with knowledge, prudence and due diligence. 145. Pubcos should provide their tenants with a comprehensive breakdown of how their rent was calculated. This should reveal the whole detail of the profit assessment and how the specific requirements of the lease conditions had been interpreted by valuers. The profit assessment should form an addendum to leases, with any subsequent review, to ensure transparency. 3.7 The BBPA primarily represent brewers and the property owning Pubcos and erroneously hold itself out to represent the tenants in their retail capacity. The fact is the leases only give Pubcos property and beer supply rights and deny the Pubcos the right to interfere with the retail activity. The BBPA therefore exceed their authority to be the spokesperson on retail issues aVecting the 25,000 plus tied tenants. The revised Code of Conduct from the BBPA totally ignored all of the T&ISC recommendations. 3.9 It is plausible that the BBPA, through its membership, ensure that Pubcos and Brewers act in a concerted manner. Do the beer prices increase in harmony? Do the discounts given to Pubcos increase when the wholesale price does? Both are contrary to the public interest. Superficial examination suggests that the answer to those two questions is…… Yes! These are the questions which the OFT has been asked to examine. 3.10 The RICS Guide to Valuation of Rent and Capital Values for Pubs totally ignores all the recommendations of the T&ISC. This could arise because the Chairman of the Trade-Related Group is a full time employee of a Pubco and the majority of the other members are employees of firms engaged by the Pubcos in matters relating to rent appraisals and/or property valuations. The expression “Gamekeeper and Poacher” come to mind. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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3.11 The Trade & Industry Committee recommended that the OFT review their monitoring process. To the best of my knowledge they have not. The Trade & Industry Committee said: 38. We disagree with the definition of the public house market which the OFT has adopted in the past. We recognise that the licensing regulations are due to change. However, we do not believe that these changes will alter the shape of the market itself. Nor are we certain about the speed with which the new licensing regulations will be implemented by the licensing authorities. It seems to us that there is time for the OFT to reconsider its previous definition so as to more accurately define the market in question and to establish mechanisms for monitoring it. (ii) Furthermore the OFT have failed to report on the issues of distribution, a positive change could assist tenants if implemented. (iii) 71. In the distribution market for beer there is the strong possibility of anti-competitive consequences. We would hope that the OFT’s latest consideration of market concentration in this area will not be their last. The distribution market should be kept under close and regular scrutiny.

4.0 Stability 4.1 All of the above have a serious impact on both the survival of the British Pub and the financial stability of Pubcos both through the Profit reported and the presentation of asset values on their Balance Sheet. The elements that aVect these are: 4.2 The wholesale profit extracted from the brewers is in the form of discounts. It is understood that supplying brewers have increased their wholesale price in order to increase the discount given to the Pubco. Greater discounts retained by the Pubcos serve the needs of the Pubcos but they are in fact detrimental to the consumer. This was reported to the Trade & Industry Committee by the small brewers but the practice almost certainly permeates through to the bigger brewers. Bigger slice for Pubcos, means smaller slice for tenants and higher price for consumers. 52. It was suggested to us that small brewers found it diYcult to gain wholesale price “listings” for their products from Pubcos because small brewers’ price diVerential, or discount, was considered too low by pubcos. 63 One small brewer told us when they tendered their product to a particular Pubco, the Pubco “had no interest in the price we would actually sell our beer to them for, or even what the price to the tenant would be. What they were interested in and were very interested in was DISCOUNT”. Their tender was rejected due to the low discounts they were quoting. The small brewer re-tendered the following year quoting a higher wholesale price: “our solution was simple for the following year—up went our list prices and up went our discount, the price we quoted was exactly the same but the Pubcos’ slice goes up”. 4.3 The information regarding actual discounts that are available have not been released to over 98% of tenants as recommended by the T&ISC. 125. As with any commercial contract, we believe the actual details of Pubcos’ contracts with individual brewers should remain confidential. However, we believe that Pubcos should advise their tenants of the average discount they receive, how this compares to the free market discounts available, and how much of this discount Pubcos are passing onto their tenants. 4.4 Listing fees payable by suppliers continue and are not conducive to competition. As the Trade & Industry Committee reported: 51. SIBA told us Pubcos demanded fees for listing them on Pubcos’ wholesale price lists. These were not “listing” fees in the normal meaning of the term but marketing fees to advertise the small brewers’ brands which would be put into the marketplace. These could be a serious financial commitment for the small brewer which was paying these fees without any guarantee of the volume of its product it would sell. The expense could be prohibitive, with the result that small brewers could not compete with the national, or even regional, brewers. Small brewers would rather deal directly with local tenants “so when it comes down to marketing they have got the ability and the resources to pop down to their local pubs and go and talk to the licensees and do their marketing that way and also stand. 4.5 The income from AWP machines in the form of both royalties from the suppliers and the unaccounted share of income when the machines are emptied continues. The T&ISC observed: 132. Pubcos’ tenants, who are tied for AWP machines, pay higher rents for AWP machines than tenants who are not tied. This is due to Pubcos’ practice of extracting royalty payments from AWP operators to become a Pubco’s nominated supplier. We feel many tenants may not be aware of these arrangements. If the AWP machine tie is not to be removed quickly, there is no reason why pubcos could not immediately introduce more transparency about their contractual relationships with their nominated AWP operators. 4.6 The eVect of the above acts against the principle that “the tied tenant should not be in a worse financial position than if they were free of tie”. This unsatisfactory situation has been perpetrated by Pubcos and endorsed, quite wrongly, by the BBPA and RICS. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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5.0 Profit 5.1 The Pubco profit is enhanced by the retention of income that should have been released for the benefit of the tenant. Their practice slowly starves the tenant of income and higher product prices create higher retail prices which in turn create consumer price resistance causing a further downward spiral of turnover and tenants profit. 5.2 Pubco replacement of tenants have historically been filled from the fairly large pool of people who are of the opinion that running a pub sounds a good idea. Pubcos feed that belief. The Trade & Industry Committee recognised the issue when they stated: (iv) 158. The Pubcos have argued that if tenants do not agree with their rent assessment, they should not have entered into the lease or accepted the rent review. We do not share this view. In the relationship between Pubco and tenant, the tenant is in the weaker bargaining position. Pubcos should recognise that they have a responsibility to ensure they do not exploit their position of economic strength. All tenants should be treated fairly and rents should be reasonable and sustainable. 5.3 The development of a nationwide register, containing the full details of how the profit has been assembled and the rent assessed, would have created greater transparency for new and existing tenants. This has been resisted by Pubcos and RICS. Pubcos feed on obscuring facts. Should a register be developed the deception perpetuated by RICS suggest that it should not be trusted as the custodians of this information. If a register is developed another more impartial custodian must be found, perhaps the Valuation OYce coupled with the Land Registry. (v) 157. We believe it would be preferable for the industry to develop a nationwide register of rent reviews, accessible by professional valuers representing both sides of the industry. Although we believe the proportion of rent reviews not resolved amicably is small, such a register would increase transparency and reduce contested reviews.

6.0 Freehold Valuations,Accepted Practice and Malpractice 6.1 What should be the accepted practice: 6.1.1 The Open Market Freehold value for a pub is, and should be, based on the retail profit they can generate free of tie. Such retail earnings would be before interest and taxation [EBIT]. 6.1.2 It is generally accepted that “Open market value” is defined as the best price at which the sale of an interest in property might reasonably be expected to have been completed unconditionally for cash consideration on the date of the valuation assuming a willing seller and that no account is taken of any additional bid by a purchaser with a special interest. In today’s market place there is a significant need to exercise a duty of care when considering a mortgage with the credit market operating under stress. A sensible valuation could reasonably be based on three to three and a third times factual EBIT with borrowing limited to 65%–70% of the total value. This level of borrowing could be considered prudent and reasonably acceptable as an alternative to cash. 6.1.3 The issue of a purchaser with a special interest highlights the exclusion of supplementary streams of income such as wholesale profits which are quite separate to the retail operation and also extra profit generated through special persona or brand. 6.1.4 For Public companies such as Pubco there is a legal requirement to ensure that the Balance Sheet of the company should satisfy the cardinal rule that it reflects “a true and fair view”. That principle necessitates Tangible asset values not only to reflect sustainable open market property values but also that they represent the net realisable value, which would normally be determined according to the principle of orderly disposal unless the entity is in financial trouble. 6.2 But the Pubcos appear to take a diVerent attitude with regard to valuations. 6.2.1 When a Pubco desires to purchase of a pub it also considers the other supplementary income streams, not available to the open market, such as listing fees or wholesaling profits which they would enjoy either through trading or tied lease. Their purchase price would include the tangible asset related to retail profit and the intangible asset relating to the other streams with the values of the two elements separately displayed in their Balance Sheet. But are they? The capital value of the intangible asset would be extinguished by the loss of the supply tie, and/or the wholesale business. 6.2.2 Merging of intangible and tangible asset values is not only contrary to Accepted Accounting Practice but would deny adequate depreciation and overstate implied security value. If, as is suspected, the merging asset values has been practised that would account for the existence of greater borrowing. Such practice, if proven, would mirror both the Enron debacle as well as embracing the issues surrounding the “sub-prime” market because the Balance Sheet would fail to represent a “true and fair view”. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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7.0 An Illustration Suggesting the Existence of Asset Merging

7.1 Taking just one Pubco. Examination of the published audited 2007 accounts of Enterprise Inns plc, relating to 7,783 pubs indicate that the average pub for the company: Is valued at £736k [£5710 million/7763]. Has average goodwill attached to it of £60k. Has borrowings against that valuation of £736k amounting to £492k [ £3,819 million/7763] which is 67% of the value they have placed on the asset. Is supported by shareholders funds of an average of £191k, [£1,463 million/7763]which would be diminished by 32% in the event declared goodwill was written oV. Has an annual rent of 33k which has risen 18% from 28k in 2003. Rents have been structured rents on the basis that the average pub can earn for the tenants 33k per annum plus any benefit of living in. [Enterprise have no factual evidence to support that hypothesis]. There is good reason to believe that their estimate could be out by at up to 50%, because they ignore actual data and rely on unsubstantiated opinion, which would mean that even for a sole tenant the income would be below the equivalent National Minimum wage as would the 33k be for a “couple” working 60 hours each per week. Accepting their rent and profit assumption for the average tied pub, taking a view on what discounts could be earned in the open market, the average profit trading as an independent free of tie could be extrapolated to an average pre tax profit [EBIT] of £80k per annum. 7.2 To consider the simple question of what the freehold value may be revolves around the retail profit and its ability to service debt as well as provide a liveable income. Using the Enterprise data the EBIT would be £80,000 per annum. 7.3 Consider what level of debt the provable 80,000 joint income for a couple could support. A prudent lender may consider three and a third times income provided the borrower could fund a third of the purchase price. Borrowing would be in the order of £267,000 against a sensible purchase price not exceeding £400,000. Given the same profit base as Enterprise this is vastly diVerent to the £736,000 valuation and £492,000 borrowing reflected in the Company accounts. It would appear that Enterprise is borrowing more than the average pub may be worth.

7.4 What is the point of this examination?

7.4.1 The examination above, based on an average of 7,500 pubs, appears to demonstrate that the Enterprise asset valuation and borrowing is verging on the unbelievable and unviable. Their continued existence would appear to rely on cash flow extracted through excessive rents as well as the high prices they charge for beers etc. It also suggests that if all the other Pubcos are operating with similar propositions then none of these Pubcos have any real scope or ability to manoeuvre financially. The financial manacles deny them flexibility. 7.4.2 The original recommendations made by the Trade & Industry Committee are as valid today as they were four years ago. The Pubcos will not want to reveal their financial predicament even though it is obvious and therefore will seek to suggest that they have done everything possible towards the T&ISC recommendations and that they are helping tenants by reducing or rolling up some rents. The proof of Pubco defiance can be seen by the number of pubs being closed, abandoned or even tenants buying out of tie in an attempt to survive. They may blame everyone and anyone for their dilemma but fundamentally it can be seen to have been caused by greed. Hopefully the BESC will not be deflected from defending the consumer as well as the 15,000 to 25,000 tenants requiring transparent and ethical support to ensure their survival.

7.5 The impact of current trading

7.5.1 The past year has seen pub turnover fall by more than 10% at the same time as operating costs have risen by 10–15%. Recognising that historically the best average rate for pre rent profit to turnover was 25%, and the rent was half, means that these economic changes result in the average tenants income/ profit falling from 12.5% of turnover to 2.5% of turnover. That is an income drop of 80% which will take most tenants into a poverty trap. It cannot be ignored that the fall in turnover and increases in cost stated have not yet felt the full brunt of the credit crunch, loss of employment or negative equity. Economists have indicated that the downturn could continue for a couple of years before bottoming out and then take several years to recover. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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7.6 For the British heritage of Pubs to survive

7.6.1 Tenants need: To be able to buy at much lower prices, which can only be achieved by a release from tie. Real competition to be encouraged between suppliers and wholesalers. 7.6.2 Landlords should: Ensure rents embrace and adopt the principles of paragraph 144 and 145. Abandon all upward only rent reviews including annual RPI indexation. Allow tenants to select AWP machines from suppliers of their choice, and for the tenants to receive the full income. Examine and adjust their Balance Sheet property values to reflect Tangible Asset values based on realistic retail profitability, debt service and liveable income in the current market. If appropriate apply financial reorganisation; if necessary banks/bondholders may have to convert to equity for the company to survive. 7.6.3 The BBPA should be required to: Re-write of their Code of Practice to embrace all T&ISC recommendations, and remove the subversion relating to the rent not reducing below base lease rental. Perhaps the Code should be drafted by the BBPA and approved by Fair Pint and the BESC. 7.6.4 RICS: An independent review is required of their Trade Related Valuation Faculty. Perhaps their panel should be extended to include other disciplines, such as a Accountant and Lawyer. 7.6.5 For Auditors and Directors: The principle that the balance sheet should show a “true and fair view” is under the microscope. Did the Auditors of these Pubcos validate the asset values? Did they test for intangible and tangible asset values being merged? Did they test the asset values against banking and bond covenants? The existing evidence indicate that standards are not being met. They need to be!

8.0 In Summation

8.1 Pubcos have bondholders, debt to service and shareholders to satisfy but those goals should not be achieved at the cost of the tied tenant surviving on what is not a liveable income, or for consumers being burdened with an uncompetitive inflated price. 8.2 Pubcos may argue that supermarkets are the cause for the downturn in pub trade. Reality is that they get the same discounts but do not pass them on. This is clearly seen from the deviation between oV sales and on sales retail prices. In the last 20 years OV sales increased by 47%, On sales 151% while the cost for production has been the same for both. 8.3 It would be irresponsible to allow the financial greed of Pubcos to irreparably damage the tradition of British Pubs, renowned for the service and congeniality that they give to the community. They need to survive. Removal of all supply ties, and the requirement for transparency will not solve all the ills but at least the trade would be on a fair and competitive footing. 9 September 2008

Supplementary evidence from Brian Jacobs You will recall that I gave evidence at the previous meeting following written submissions by me personally and separately on behalf of Fair Pint. Over the Christmas period I have looked through the minutes of the 9 December which recorded the verbal evidence given by . . .. the BII, ALMR, BLRA . . . and . . . the CEO’s of Enterprise and Punch. There are many points that I have issue with. Following the invitation by the Chairman Peter LuV to oVer further presentation regarding things I did not have a chance to say or that I wish to clarify I have selected the particular questions, the answers given by the witness and added my personal comment. In addition I have added at the end evidence that supports my comments. I do hope that you and the Committee will find this useful in your deliberations. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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EXAMINING THE UNCORRECTED TRANSCRIPT OF MINUTES OF THE BUSINESS & ENTERPRISE COMMITTEE ON 9 DECEMBER 2008 Two specific issues come up time and again: 1. The Prime Principle . . .. that the tied tenant should not be worse oV financially than if they were free of tie [133, 178 and 179]. 2. The Five Essential recommendations [129/130; 144; 145; 151 and 158] designed to ensure transparency, particularly relative to the “value equation”[ as mentioned in 178 and 179]. It is important to identify what has not been said, what has not been done.

Part One. BBPA, ALMR, BII Q137 and Q140 Comment: Mr Hastings of the BBPA failed to mention that none of the Five Essential recommendations or the Prime Principle have been included in their Code of Conduct. Q138 and Q144 Comment: Mr McNamarra of the BII. He did not mention that the Training of Pub Tenants to understand and identify profit, rent and lease responsibilities of both landlord and tenant are essential for the survival of pubs. The ability to survive comes first and the nuances of how to improve various elements of the trade, such as ensuring beer pipes are properly cleaned, hygiene standards etc are important but not as important as understanding how to survive. The BII have consistently failed to oVer any training with regards to profit assessment in whole detail or for the construction of the rent. The T&ISC recommendations para’ 144 and 145 as well as understanding UORR 151 has never been included within your training programmes. It is therefore incorrect to say they have prepared/trained people in readiness for a tenancy. Financial viability is all about survival that comes first followed by standards! Q146 Comment: Mr Bish did not mention that between 1994 and 2004 licensed pubs and hotels increased by 8%, 6,000 in number. Q146 Comment: It was not made clear that it is the customer who ultimately chooses as to whether they want and will patronise a pub in their neighbourhood irrespective of whether the quality of the people running it can make a success of the business. Customer desires all hinge on the issue of retail cost, accessibility, smoking etc, and none of these relate to the people operating the pub, but all relate to the consumer choice. Q148 Comment: Mr Hayward did not make clear that independent advice is only one element for the Pubcos/BBPA have a responsibility to act properly and transparently. [TISC 158] Although the BBPA were urged to include the Five Essential recommendations and the Prime Principle they chose to ignore and did not include in their Code despite requests to do so. Q148 Comment: Mr McNamarra did not reveal that the BII have not supported fairness, national accounting standards, knowledge, due diligence or prudence. In fact nowhere do the BII support transparency in their training programmes. Although Mr Bish went on to say . . . the BII have undoubtedly done a sterling job in improving the transparency of codes, that statement cannot be correct or acceptable given the above failures regarding transparency etc by the BII. Q149 Comment: It was not revealed that the BII had done nothing towards embracing the Essential Five T&ISC recommendations or the Prime Principle in their package/training. It has to be recognised that to have done so would meant they would have been opposing the Pubco stance which in turn would aVect the financing from Pubcos. Unless the tenant has knowledge of profit assessment and rent instilled into them they will have little or no chance of survival. Q153 Comment: In response to “Do you agree with Morgan Stanley who similarly reported that 20% to 30% of tied pubs could be uneconomic due to the high rents? Do you think that is true?” Mr Bish should have said...Ifprofitandrentarebased on unrealistic theory, which may be substantially apart from reality, then pubs will fail. Essentially the T&ISC recognised that point and their Essential Five recommendations, if implemented, would go a very long way to removing this issue. Factual historical performance should be the prime reality check. Pubcos, the BBPA refuse to go down that route and the BII are afraid to give tenants the training that would prepare them to understand that turnover and profits do not increase at a whim, or overnight. Attitudes towards financial integrity relative to the tenant need to change. Theory based on ideology has to be replaced with theory supported by fact relative to the history of the pub as well as proposals. Q154 Comment: Relative to RICS guidance being fair, Mr Hayward failed to elaborate on the fact that the House, EU, EC and Appeal Court are all conscious that true and fair competition in the form of the Prime Principle, must transparently exist and that this can only be achieved through full and proper assessment to establish the “value equation” is in balance. That requires the Five Essential recommendations to be adopted, but the Pubcos and BBPA and will not support that and neither will RICS or its members at the present time. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Q155. Comment: Do RICS take account of the higher cost of tied produce when considering rent? The answer is that there is no such adjustment by RICS although the UK and EU support that Prime Principle. Why is there no oVset made when clearly it is essential to ensure that the tied tenant does not suVer substantial injustice? Consider the origin of the problem, which can be grasped from a detailed witness statement prepared by Rob May [as chairman of the RICS Trade-Related Group and ex-oYcio member of the RICS Appraisal and Valuation Standards Board] who happened to be a senior rent adviser to Inntreprenneur, Unique Pub Company and now Enterprise Inns plc. He is adamant that the RICS rules do not contain any reference to “fairness or transparency” nor does RICS concern itself with methodology when considering rent or capital value. Thus the RICS view is that the whole of the T&ISC should be ignored, fairness should not be considered and most certainly THE TIED TENANT SHOULD BE FINANCIALLY WORSE OFF THAN IF THEY WERE FREE OF TIE. There is the hub of the problem for tied tenants. Almost by decree RICS refuse to accept the Prime Principle or adopt the Five Essential recommendations of the T&ISC. Q157 Mr Hayward said: I think it is fair to say, Mr Hoyle, that if one looks at the share valuations in recent weeks, and you have made reference to a particular City company, you make your judgment about pub companies which presumes they are not reaping those monies . . .. Comment: That is sheer arrogance and an attempt to hide the real cause. The pub companies are suVering because they paid too much for their pubs, borrowed too much, overvalued their assets, incorrectly [ and probably illegally] defined their assets as tangible, and in order to service that excessive debt have tried to screw more out of the tenants through retaining more discount and increasing rent during a period of falling turnover. The retail trade and profit just are not there to satisfy their demands. The Pubco greed has been recognised by the city. Q161 Mr Hayward said: . . . there is a regulatory burden associated with employment in the line which makes it uneconomic to have managed houses at a smaller level. The point at which you operate a managed house has risen ever higher in the last two decades. Comment: Hayward is suggesting that pubs with lower turnover and profit do not have exactly the same regulatory burdens. That is not only stupid but a total misrepresentation of fact! There are no regulatory burdens for managed houses that do not apply to any pub tenant. That is the problem. BBPA like many Pubcos dishonestly think that by hiving pubs oV to individuals then the lessee/tenant can cheat to avoid regulatory burden. That is an unacceptable assumption but it results in Pubcos having the expectation that operating costs can be lowered which in turn allows them to demand a higher rent. Yet another reason why tenants have financial diYculties, and yet another reason to enforce T&ISC recommendation 144 and 145. Q163 Mr Hayward said when referring to the BBPA oYce rent said . . . BBPA have an upward only rent review built into my rental agreement. Who operates that upward only rent review? Who is my landlord? The Department of Health. Comment: Such a statement reveals the lack of his knowledge and understanding regarding pub rent compared to commercial rent. The BBPA is not a pub it is an organisation which does not trade and it occupies commercial premises. That commercial oYce can be used for virtually any purpose and upward only rent reviews do not depend upon profitability. Pubs however are single use properties rented according to profitability. Profit does not rise in accordance with RPI...hence applying RPI to rent is a totally dishonest application relative to a pub rent. Failure by BBPA and Pubcos to understand that is almost unbelievable but a contributory practice that leads to pub closures. Q170 Comment: The question was ...Areyousaying that RPI rent reviews are the right way to look at individual businesses? Mr Hayward said . . . What is right is the agreement between a company and another business because both parties enter into that, presumably having taken their own professional advice. Whether that is RPI or whether it is in some other form, that is a decision of two businesses coming together. . . .. That statement by Mr Hayward is an exaggeration because invariably the Pubco policy is that on most matters...take it or leave it. Q171 Mr Binley said: Let me put you in my position. Would you advise that they should not use RPI as a factor in defining rent increases? Mr Hayward answered: No, I would advise them to take their legal and financial advice as we do and then take a judgment. In current circumstances, all these matters are up for review. Evidence has been given by diVerent companies indicating many of the diVerent processes that are being undertaken, given all the diYculties that are currently being faced. Comment: This is a prime example of where Hayward was wrong to say NO; it is demeaning and an insult to integrity! The T&ISC recommended no upward only rent reviews and yet here is a man saying . . . its OK. No it is not!! Q182 The Chairman asked: . . . with regard to the amusement machine supplier, royalty payments and sharing of income could I ask Mr Hayward to comment on that particular observation from Mr Bish? Mr Hayward responded: As far as we are concerned, I disagree with Nick because, as he indicated, as part of the construct, using his term, there is a variety of diVerent forms of leases and tenants’ agreements and some include game machines and others do not. In terms of providing game machines, because the Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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companies concerned have experts in those, they will advise pubs as to what sort of gaming machine is best for their particular venue and they have a vested interest in doing that in terms of maximising the take on it. There are varying relationships. Comment: However what Hayward failed to say that the BBPA had ignored the T&ISC recommendation that Pubco interference and direct sharing should cease. Here is Hayward supporting its continuance by saying there are many diVerent forms of lease. DiVerent lease types have no bearing on the issue because the income has never been properly reflected in the lease rent structure. Cease the AWP tie and interference it is that simple. Stop their involvement! Such cessation would stop that dishonest Pubco double dealing and top slicing. It needs no legislation and would give a substantial boost to the survival of pubs. The BII were aware of the T&ISC recommendation but did nothing to support the release of the grip of Pubcos on the awp element. Why? Probably because it would aVect the relationship of the BII with Pubcos. Q185 The question from Mr Wright for the BESC . . . was how much would the removal of awp tie cost? Comment: The financial answer was not given. The accounts of Enterprise and Punch indicate that the removal of the machine direct involvement would cost Punch and Enterprise £25 million each, that is about an average of £3,000 per pub. This is income which should go to the tenant, be included in the profit of the tenant and thereafter included in the rent computation. Q199 Comment: While Mr McNamara indicates that they would like to assist in dispute resolution. He claims that the BII as a professional body can oVer advice on a Code of Practice issue. He claims that the BII have an accreditation procedure relative to Pubco Codes of Practice and yet....TheBIIwill not accept and adopt either the Prime Principle or the Five Essential T&ISC recommendations. That failure means that the BII support the Pubco stance of ignoring transparency and thus supporting that the tied tenant will be browbeaten and submit to Pubco rent demands and pricing practices. Such failure by the BII denies any semblance of professionalism, their claim to accredit Codes of Practice or stand in any position relative top dispute resolution. Q202 Mr Bailey said : I think everybody would say that the development of a low-cost arbitration service would be a benefit, but the fact that it does not seem to be used seems to indicate that not many tenants either understand, or appreciate, it. Comment: Mr McNamara indicated that the BII were taking legal advice and talking to Pubcos indicating that they would like to progress a low cost service and that their national council and our members are very much in support of it. How can the BII be trusted? They will not accept the Prime Principle or the Five Essential recommendations both of which are essential to ensure transparency and fairness for the tied tenant which means they can have no status or eVect because they are just a pawn for the Pubcos. Q203 Mr Bailey stated : Can we just move on to the pub leasing model, the Code of Practice. It would appear that in certain circumstances the leasing model is rather out-of-date and out-of-line with the Code of Practice. What should be done within the industry to align them? Comment: Mr Hayward defended the existing model. He could not understand that Fair Pint recognised those small brewers, less than 500 pubs, needed protection for their personal brewing. He did not give any credence to the fact that Pubcos were not brewers; they were in fact nothing more than factoring agents relative to produce, and buy to let agents relative to rent. He also sought to support arbitration, no doubt knowing that arbitrators were in favour of not supporting either the Prime Principle or the Five Essential Recommendations, since this increased Pubco income at the expense of tenants. Q204 Mr Bailey asked: Would you like to comment on what Mr Hayward has said, Mr Bish? Comment: It is interesting that Mr Bish referred to the sale of leases and that they have been sold for five times earnings. That is worrying because the concept that a lease should be sold for a multiple of profits was and still is a dishonest practice. The lease should only have a value if the tenants profits are greater than those that would equal to rent. If the profit is actually equal to the rent then there is no goodwill or profit improvement passing. A new lease with a tenant even on a free of tie basis is based on no premium and the landlord and tenant sharing profit 50/50 . . . so there is no value to the lease at commencement. Regrettably over the years valuers have been suggesting that a lease has a capital value even if the profit was equal to the rent, ie the same as if it were at the start . . . that is dishonest. Success and hard work over the years that provide an extra profit above and beyond that necessary to equate to the rent would be the figure on which a multiple could be applied, and nothing for the lower figure or the same. Q206 The question was . . . It would appear that in certain circumstances the leasing model is rather out- of-date and out-of-line with the Code of Practice. What should be done within the industry to align them? Comment: Mr Hayward stated that the BBPA had made changed to their Code and suggested that lease agreements were an ever changing model. He admitted that the business has changed over the last four years. What Mr Hayward has not revealed is that NONE of the Codes have been adjusted to embrace the Prime Principle or the Essential Five recommendations. 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occurring would be reflected in rent adjustments and reviews. It is not the nature of agreements that have to be changed to cater for behavioural and trading circumstances, it is the basis of financial calculations that are not stated or defined in leases.

The following relates to Pubco evidence Q208 In response to the question regarding the level of earnings Mr Tuppen quoted...andIbelieve the numbers are 112 of our licensees, are actually earning profits in the band of £20,000 and below. The average profit for our licensees we estimate to be in the region of £42,000. Comment: But is that correct? According to the accounts of Enterprise for 2008 the average licensee was in their opinion, based on their expectations for their 7,500 pubs, was £32,5001 per annum to which Mr Tuppen has quite erroneously added a figure for what he believes is the benefit of a tenant living in. In the open market when rent or capital values are calculated the benefit of living in is always excluded because it does not exist. Any benefit deemed by the Inland Revenue is taxed. It is therefore exaggeration on the part of Mr Tuppen to include that figure. Additionally it is known that over the last 12 months turnover has fallen and operating costs have increased to such a level that the income of the average tenant will have fallen by at least 50% down to £16,000; and that can be for two persons. The statement by Mr Tuppen that . . . “even though these licensees may be earning less, on average they are still earning enough to have what would be regarded in diYcult circumstances as an acceptable living”. Comment: At an average of £16,000 per annum for one person working only 60 hours per week this equates to £5.12 an hour and if there are two then it would be £2,56 an hour. Hardly an acceptable living given the huge highly personal responsibilities, which are far greater than any employee or even manager may ever have. Q211 Mr Thorley said . . . Our Punch Charter was the first to be accredited by the BII. Comment: That statement by Mr Thorley is meaningless because the BII do not support either the Prime Principle or any of the Five Essential recommendations from the T&ISC recommendations. There is no point in using plain English if the essence of transparency is omitted. Mr Thorley goes on to say we clearly aim to settle any disputes we have with our customers in an amicable way and in an eYcient way and it is just good business to do so. Comment: For the tenants the fear of huge financial costs to defend their position generally makes the tenant back oV and submit. Mr Kendall said “I would reiterate that our business really survives on a partnership”. Comment: That is some word . . . partnership...thedefinition of partners needs to be explained to Punch… their belief is similar to that of people cohabitating suggesting it is the same as marriage but legally, spiritually and practically they are poles apart!.There is no real partnership relationship. Mr Kendall goes on to say In addition to the business relationship manager, we also have experts around property, machines and vending. What Mr Kendal ignores is the recommendation that Pubcos should not control any aspect of awp machines, [T&ISC 129/130] Q212 Miss Kirkbride: Mr Tuppen, do you roughly agree with those advantages? Mr Tuppen said : The sale of cask ale in our estate runs at about 14% and, as you know, cask ale is something that is very highly valued in this country. Comment: Reality is that nationally cask ale represents 6%. For Enterprise to achieve 14% would mean that all the rest of the pubs in the UK are achieving 3% or less. IS THAT REALISTIC? Proof is required. I would guess that Enterprise include more than “cask ale”. Mr Tuppen also said “There is just one point, I think, for clarification that I would like to draw your attention to, and I am sure you have read it, but the 2004 TISC inquiry did conclude that “the tie usually balances the costs and benefits available to tenants” and that “the existence of the tie provides demonstrable benefits to both tenants and customers alike”. Comment: Mr Tuppen is right but the T&ISC also said that the “value equation” suggests that the countervailing benefits receive should leave the tied tenants the same position than if they were not tied at all [178] It went on to say they did not have suYcient data to confirm that point. The T&ISC covered this by recommending 144 and 145 which would have drawn together the whole detail of countervailing benefits, how they occurred, how they were accounted for by inclusion in the profit assessment, and how the Pubco would take their share of the “presumed greater profit” thus resulting in a greater rent for the Pubco. Mr Tuppen also said “the TISC in 2004 did not conclude that the tied tenant should be financially no worse oV than the free-of-tie tenant.” That was never a conclusion. It is a point being peddled frequently by the Fair Pint Campaign, but it ignores entirely all of the other benefits which Giles just referred to that we give to our tenants.

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Comment: He is most certainly wrong. The T&ISC said in 133 and 176 that they concurred with the EU, UK competition commission, and the Appeal Court, that the net cost of the beer tie makes them no worse oV than if they were free of tie. The Appeal Court also concluded that the dry rent should be reduced to compensate for the higher prices paid for resale goods The proof that the tied tenant is not worse oV can only be established by completing the Value Equation. Also it must be remembered that benefits received by the tenants are included in the profit and then shared by the landlord. And therefore so called benefits are not solely for the tenant and cannot form any part of the value equation. Mr Tuppen by his statement is advocating that the tied tenant should be penalised and should not earn as much as if they were free of tie. That is anti-competitive and should not be accepted! Q213 Miss Kirkbride said: Why do you like to push your pubs into long-lease tied agreements rather than managed or free houses? Why can they not be allowed to choose? Mr Tuppen replied: Well, we do not run a managed estate and we do have some free-of-tie pubs, just a handful.. For that, I also would stress the point that the tied system does provide for licensees a low-cost entry into the pub business. The average cost of a good pub, as you can fully understand, is £700–800,000. Comment: Now that figure of £700–800,000 is unsubstantiated. The value of a pub is based on a multiple of earnings, usually actual rather than perceived profit, allowing for borrowings to be capable of being serviced and the owner/operator earning a liveable income. Such a multiple would generally be in the order of a total of five times profit. Enterprise and Punch have values averaging the £700–800,000 figure but their valuation is not based on the profit of the pub but by including a proportion of the awp profit, listing fees income, insurance commission, wholesale profit and any other profit stream that they may make as a group, not as a pub. Technically they should not include those other income streams to value a tangible asset, to include them is tantamount to fraud. [See analysis of their 2008 accounts at the end] Q214 Miss Kirkbride: Do you have anything to add to that? Mr Thorley: In simple terms, we have around just over 200 pubs which are leased on a free-of-tie basis and one of the businesses that I was involved in was a free-of-tie pub company, so I have seen both parts of the equation. I made this point four years ago and it still is as valid today, that we could lease the pub for £20,000 income[INSERT BY ME . . . what he is really saying . . Let us be clear about this. The pub free of tie producing £40,000 a year before rent would support a rent of £20,000], just straight rent on a free-of-tie basis, or, alternatively, we could lease the pub for £8,000 and we would receive, say, £2,000 for the machine tie and £10,000 from the tie for the beer supply, and what you have is a very, very much lower cost fixed element, and the other remaining parts are changing all the time. Comment: This all sounds good. Thorley is suggesting that the sum of the wet rent and tied rent should equal the total rent, he appears to be advocating the PRIME PRINCIPLE which Tuppen Q212 disagrees with. But that is not what happens in Punch, he is not telling the truth. Following the policies of Punch that same pub would make not £40,000 before rent but £30,000 as a tied tenant, they would take half of that lower profit, that is £15,000 rent and in addition keep the £10,000 from beer and awp, totalling not £20,000, as Thorley suggests, but £25,000. That is where the deception is perpetrated. Q215 Miss Kirkbride: Can you give me an idea then about what is going on in your estate. How many of your pubs, taking both of you in turn, are making money for you and how many are making money for your tenants, and we have a rough idea of the average income, but just so that we know what is going on? Mr Tuppen: Over the last four years since the TISC inquiry, coincidentally to some extent, although I suppose, given the nature of the agreement, not that surprisingly, our income from pubs, our gross margin earned from pubs has increased by 7% and that is exactly parallel with the growth in earnings for the tenants which has gone up by about 7.2%. Comment: There is no proof that this is true. What is true is that EI takes 50% of their assessment of what they believe the pub should make, therefore if their assessment goes up 7% then their rent goes up 7% and that is the basis of their assertion that the tenants income is that it goes up 7%. Their statement is not based on fact. Q216 Miss Kirkbride: But how many of your pubs are on rescue packages or have gone bankrupt? Mr Tuppen responded. Currently, we have about 800 licensees who are receiving help and the average cost per month for us is running at about £1.3 million, so we have got about 800 pubs in, as I would describe it, some form of intensive care. Comment: Tuppens figures say this equates to £1,625 pcm or £19,000 per annum. If the average rent is £32,500 that means that 800 pubs will have a rent of £13,500 and he wants you to believe that the average rent for the group next year would then fall to £30.6k. Q218 Miss Kirkbride: Can you give us a flavour of those [closed or aided]for you? Mr Thorley: I cannot remember the order, but specifically in terms of aid where we are helping our estate, I think the number that we are helping is slightly higher. There are 1,800 of our pubs that are receiving, and there is a degree of double counting there, some form of rent concession or additional discount on beer, given the unprecedented circumstances in the market at the moment. In terms of the number of failures in the last Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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year, I have not got the number of evictions, but there will be materially less than that. It is 575, of which we have relet 484 in the same timescale, so you can see net that it is just under 100 that have not been relet thus far. Comment: But the TSAW statistics available from Punch indicate that there are about 1,654 including those abandoned, changes to short TAW terms, notice, retail failure, customer failure etc. Q218 Mr Townsend refers to “whole idea of the business support that we are providing is designed to try and prevent business failure”. Comment: Actually Mr Townsend probably means “closure” rather than failure. If a pub closes it would probably aVect their banking/borrowing covenants and therefore it is essential to keep it operational almost at any cost. Mr Townsend also said I would also wish to make one point, that there is a sort of urban myth that has been propounded by various parties that the temporary support provided by companies in some way is repayable, and can I make it very clear that, as far as Enterprise is concerned, no amount of the business support that we provide in additional discounts or rental concessions is repayable; that is simply not the case. This is permanent financial assistance over a temporary period of time designed to prevent the business failing. Comment: This is simply not true, they frequently demand harsher trading terms and secrecy. Q219 Miss Kirkbride: You both have a rather eye-watering level of debt loaded up into your companies. Mr Tuppen replied: We have approximately £6 billion worth of pubs and we have approximately £3.6 billion worth of debt. That is a 60% mortgage. If you knock a few noughts oV and if we had a £600,000 pub and a £360,000 mortgage, I do not think that you would regard us as reckless. Comment: Now what is the truth? Consider the facts using figures in the 2008 accounts. EI pubs are said to be worth 755k and borrowing is stated at 490k that is 65% . . .. Now here is the problem. The pubs have not been valued as pubs which could be bought and sold in the open market, if they had the values would have been in 2007–08 about 420k not the 755 stated, and probably 20% less today. The valuations in the annual accounts of both companies Enterprise and Punch include intangible income from wholesaling and listing fees that are separate to the retail operation of the pub all wrapped up, quite wrongly, as being tangible. Over the last year asset values will have fallen by at least 20% and so even using their own incorrect methodology which would mean they have borrowed 81% but if taken back to the retail profitability, and therefore their realisable value of 420k maximum then clearly the borrowing exceeds asset value. So much for the claims from Mr Tuppen, the company could be insolvent. See data at end of this report. Q221 Miss Kirkbride: —property prices or earnings, but that is a matter of conjecture. Mr Thorley: The vast majority of our debt, and I mean 95% of our debt, is on a long-term mortgage, it is 30-year money at a fixed rate. In terms of our business, we have £6.5 billion worth of property and we have revalued part of our portfolio down, reflecting the current market conditions, and we have just under £4.5 billion of debt, so it is less than 70% which, in a Mrs Beeton’s school of finance, is the same as the vast majority of people have financed their houses in the UK where they have a 70% mortgage on a 25-year fixed basis. Comment: Now comparing that statement with the actual 2008 accounts figures for Punch they show asset values at 766k, 574k borrowing 75% ratio. The same argument applies to Punch as for Enterprise. Pub values based need to be based on retail and therefore realisable value, would result in less than 420k each which would reveal that Punch borrowing exceeds realisable asset value. [ Summary of the analysis of their 2008 financial statement are included at the end] Q227 Mr Hoyle: Out of? Mr Tuppen: Out of 7,500 pubs. I accept the point that you were trying to get to about pub closures, but pub failures may not appear in the statistics and I am completely prepared to accept that, which is why we specifically found these numbers for you. The 170 is about three pubs a week out of 7,500. Now, let us be very clear. There are people who, in very plain terms, are stealing from us from buying outside the tie and we have absolutely no hesitation at all when we catch them in, first of all, giving them a chance and saying, “Okay, you may have made a mistake. Comment: Neither myself or Fair Pint would advocate buying out of tie. We do recognise that some tenants, when driven to desperation or because EI refuse to supply on a debt issue, will buy out of tie to keep their pub open. The more important question is who is doing the stealing? If you look back to Q212 and 214 you will find that Mr Tuppen does not believe and will not support the PRIME PRINCIPLE while Mr Thorley tries to indicate that he does support the PRIME PRINCIPLE but from the figures he uses it actually confirms that he does not. Using the simplest of calculations both of the Pubcos by not supporting the PRIME PRINCIPLE are, in very plain terms, “stealing” [or perhaps more properly defined as misappropriating] at least £5,000 from every tenant under the guise of their lease terms. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Mr Tuppen suggests that “Were each of our pubs to buy, outside the tie, one barrel a week, we would lose £7.8 million in income.” Comment: Examination of the accounts for 2008 show that EI earned £352 million from its liquor. If those figures are equated to a single pub that would be [352m/7763pubs] £45.3k per annum or an average, assuming 200 barrels a pub, of £226 a barrel. Now if there was one barrel lost per pub per week the figure of loss would be [352m/52] £6.76 million and not £7.8 million. Q232… Mr Hoyle: So it is not the breweries, it is the wholesalers that are all on back-handers? Mr Tuppen: No, I did not say all of them, I said in certain instances, and we will happily provide you with evidence. Comment: This is interesting. Since pubs are a cash business they often pay for goods in cash. In fact Enterprise and Punch often demand that tenants either pay in cash when goods are delivered or they must take cash to the bank and only after they have supplied a stamped cash pay in slip to them will they deliver. Up to 45% of the pubs in South Wales have to follow this rule. This raises the question....When deliveries from Enterprise suppliers are made on a cash only basis what proof is there that all that cash and vat is properly accounted for. When these issues are raised . . . what is sauce for the goose . . . is sauce for the gander. Q235 Mr Hoyle: Come on! It is so serious, yet you are telling me that you do not know. Mr Townsend: Please let me finish, and this is so serious. We have got photographic evidence of where wholesalers have been providing equipment to our pubs to allow them to bypass the beer-flow metering equipment that we put into our pubs in order to ensure the validity of the contract that we have with them, and we have got evidence of wholesalers who have done that. Comment: The tenant has every right to have the wholesaler supplying and installing the necessary pipework for guest beer or cider. The wholesalers properly supplying guest ale should not go through the Enterprise system or the Brulines system. But Enterprise do not mention this in their evidence. Q247 Chairman: But you control the price at which you sell it to them. Can I just ask our colleagues, the Gileses, if they have any observations on this problem about stealing from pubs. Do you recognise it? Mr Thorley: The reality of the situation is that the factors that will aVect the price of beer are very, very significant, and I would refer you back to our submission and the TISC in 2004. It is in Hansard [sic] Ev 239, Table 2 on page 34 of our submission, and it breaks down a whole heap of things. Comment: The comparison Ev 239 shows a false picture. There are four examples shown as negotiable when in fact the reality is that there are none. Thorley: We know in everyday life how business works in terms of determining price and it can be a number of factors. Comment: When constructing the profit assessment and the rent computation the elements aVecting discounts, distance, supply etc should all be reflected in the calculation with the objective of defining what retail profit and rent the pub would yield as a free of tie house and then subsequently what adjustments should be made to the rent to compensate for being tied, eg a deduction for price diVerential and the double take of awp income. That is the essential “Value Equation” which Punch and Enterprise will not support or produce. Q255 Mr Bailey: First of all, it has been put to us that prospective tenants are seduced by pub companies’ websites, publicity agents and so on and they submit business plans which are accepted and then subsequently prove to be unacceptable to the tenant. Mr Tuppen: We can answer that. One of the things that, I think, is hugely important is that we do not want the wrong people in our pubs. Comment: That is why Pubcos will not approve assignment unless they are happy with the incoming tenant. Mr Tuppen: Specifically, and Simon has got the numbers, on assignments where the incoming licensee is not actually transacting with us, they are buying a lease at some market value from a third party, about one in three get through, so we turn down two out of three business plans. Comment: In fairness Valuers and Agents selling pub leases have to take much of the blame. Invariably those Agents also work for the Pubcos. The problem is that Valuers have been selling on a multiple of the tenant profit rather than a multiple of the goodwill. That has always been a dishonest practice which has been endorsed by Pubcos. As a generality the Pubco asks the potential assignee to submit a business plan, and any sensible plan would include the purchase price of the lease and the financing of that purchase price. The Pubco by approving the assignment know the full projected financial picture. Mr Townsend: Under assignments, we have the right to refuse our consent to assign for somebody to sell the remaining portion of their lease to somebody else. We have the right to refuse consent if we do not believe that the business plan is sustainable or that the track record, qualifications or the financing of the person buying that lease are sustainable. To make it very clear here about the diVerence between assignment and new letting, over 50% of the people who come into an Enterprise pub have actually paid somebody else, paid a capital sum to somebody else for the remaining portion of their lease for the rights to run that pub on the Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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lease which is specified with the terms and conditions in that lease and they have paid an out-goer for the right to be able to do that. . . . We clearly have an interest in that transaction and we do our very best to make sure that that transaction is correct and that the information shared between the parties has been complete. The final point I would add is that,...inexperienced people coming into a pub must have their business plan signed oV by an independent financial adviser as well as a mandatory condition that they take legal advice as well, so we make that very clear. It is not in our interest to allow either naı¨ve business plans or over-optimistic business plans which could, therefore, result in a business failure. Comment: This reaYrms the fact that Pubcos do validate assignments, cash flows and profit projections relative to the new proposed tenant. They therefore know all the details. Some Unique and Enterprise leases state unequivocally that rent is insured for a two year period, but it does not state the terms under which a claim could be made by them. Deceptive? Also what Mr Townsend he has not declared is that when a business fails they will extract the maximum they can under personal guarantees right up to individuals bankruptcy. Q257 Mr Bailey: I think, in fairness to the person who submitted the evidence, the term “seduced” was mine. That is what, I think, was a reasonable interpretation of the evidence that was submitted. Mr Tuppen: On one thing relating to that, we made it very clear that we do have 90-day cooling-oV periods and that was increased following the TISC 2004 from the then 28 days. Comment: When a person takes on a tenancy it takes them at least three months to get their feet under the table, a further six months to try and bring into line and under control and a further six to 12 to review their real financial position . . . that is two years minimum. That perhaps is why the tenants on average change every three years . . . one more year it may take for them to get out! Q260 Mr Bailey: Brulines—there are complaints that they are designed to measure beer and potential fraud, but actually they fail to distinguish between water going through the process and the result is that there have been false accusations made against tenants. Could I have comments from those who use Brulines? Mr Kendall: Yes, I can comment on that. You can actually measure the water that goes through, so that is not factually correct. Chairman: Could we have a technical note on that rather than spend time on it now? Comment: Any technical note should be supported by a factual example. In the few cases I have examined there was no mechanism to diVerentiate between . . . water . . the cleaning fluid passing through the pipes or the beer lost at commencement of cleaning or resumption of service. The statement by Mr Kendall I believe is false. Q262 Mr Bailey: Lastly, there are clauses in some pub sales that premises cannot be used as a pub again after they have been sold. Mr Tuppen: We tend to put these covenants in if we have an area that is substantially “over-pubbed”. I think there is agreement that there probably are too many pubs and the current economic climate is probably making it less possible for the unviable to survive. Comment: Is it not true that if you sold as a pub you would have to reveal its trading history and condition? Invariably that would create a very low price. It is therefore better to sell as a piece of property not to be used as a pub but for some alternative use and get a better price. That is up until right now when the credit crunch impedes even that course. It is accepted that where an area is over pub’d then cessation may be better for the remainder. However the real problem is that if a freetrader took the pub, dropped retail prices etc because of their freedom then it would be unfair competition to the tied pubs and it could kill those tied pubs in the vicinity; therefore alternative use sale protects and perpetuates the Pubco model. Q263 Mr Oaten: So is it in your business plan to help that natural reduction happen? Mr Tuppen: We will be looking to sell any pubs that we do not see as being viable. What is the point of having a point where somebody may over-enthusiastically take it on only to fail? If we just cannot see the possibility of a business plan coming together that could give a proper living to somebody, why on earth would we do that? Now, your point about the residential market is fair and in the current market it is very diYcult to sell pubs, but we are still selling. If a pub really has no future, the best thing to do is to sell it for some alternative use. Comment: But their judgement that it may not be viable rests with their view of what the rent should be as a . A sole trader, selling say real ales and specialist may well find they could make a sustainable profit and a good living but a Pubco would not tolerate because it does not fit their blinkered model. If such a sole trader took possession then it would wreak havoc on the tied pubs in the vicinity. Q264 Mr Clapham: Just turning to the point you made a little earlier when you referred to a re-evaluation of your estate, did it indicate that you have previously been over-valued? Mr Tuppen: When this valuation was done, it was done on a pub-by-pub basis because you do not look at the whole thing and value it on a spreadsheet, like a banker might. 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Comment: This is not a true statement, in fact it is very deceptive. To conform to accounting standards… true and fair view… the valuation should be on the basis of the open market value, ignoring any purchaser with a special interest such as a wholesaler, assuming that the pubs were not part of a fire sale but reflect a realisable value that would look to the profit of the business to be able to both fund realistic debt levels and a liveable income for the owner operator, and that is the basis on which a banker may consider support. The valuations are in fact carried out on the basis but the profitability of the pub is enhanced by the additional profit that can be achieved by the special purchaser namely a wholesale profit stream plus any other profit stream that may be developed such as listing fees, awp royalties, top slicing of awp income etc. In other words the properties are not valued on their realisable value or an individual basis. The profit base that should be used for individual valuation is inflated. Instead of valuing those other income streams as separate, intangible, assets they have been merged with a view to increasing the apparent tangible asset worth2. Q268 Mr Clapham: Given your reply to Mr Oaten regarding the market and the likelihood of some closures, what would you do there? Would you put them in a land bank, ready to sell for development at some time in the future? Mr Tuppen: We are tending to sell them on a regular basis. We are selling five or six pubs a week at the moment. Comment: That is 300 a year, 1500 over five years and that 20% of your estate, or 4% per annum. Q270 Mr Clapham: On to the rent situation, when a prospective tenant is moving into one of your public houses, do you divulge to them the previous sort of performance of that public house? Do you tell them about the bankruptcies, if there have been any bankruptcies? Do you tell them about the performance of the last person in that public house? Mr Townsend: I am almost sure that we would not divulge the personal information relating to the prior occupier of a house and the personal financial situation, but the trading history of the pub, absolutely. We will share with them the information that we have available, and that is typically the sales of products that

2 See Punch Taverns securitisation valuation of assets available on the Web showing the inclusion of all supplementary income streams. The following is an extract. 16.0 VALUATION OF THE PUNCH ESTATE The Punch Estate comprises 4,304 properties. The valuation has attributed a single figure to the whole Punch Estate rather than individual values for each of the properties. In our opinion, the Punch Estate would be marketed as a portfolio and sold as a whole rather than as individual units. The valuation reflects the most likely manner in which the Punch Estate would be sold/oVered for sale in the market.

We have deducted purchaser’s costs of 5.75%. from the value of the Punch Estate. It is acknowledged that in practice large portfolios of pubs are purchased by way of a corporate acquisition and therefore stamp duty at 4.00%. would not be payable. However, a deduction of purchaser’s costs at 5.75%. reflects the fact that a valuation of property is being undertaken and not a corporate entity.

From information provided to us in respect of the Punch Estate by the Borrower at the date of valuation, the Punch Estate had a net rental income of approximately £114,523,955 per annum exclusive and generated a barrelage volume of circa 936,734 barrels per annum.

In arriving at our valuation we have looked at each of the three levels of income referred to below, based on its respective security.The most secure income is inevitably the net contracted rentals from the occupational tenants which as we have stated above amounts to approximately £114,523,955 net per annum exclusive.

The second level of income is in respect of the discount which has been negotiated in respect of the Punch Estate with breweries for the supply of beers based on a total sales volume of circa 936,734 barrels per annum.

The third level relates to the income derived from machines and other unlicensed income from individual pubs. This we are advised by the Borrower currently equates to approximately £15,398,850 per annum exclusive.

We have attributed diVerent yields to each element of income to reflect its “risk” in terms of potential growth and its continuity into the future. The overall “blended” yield for the respective diVerent incomes has then also been applied to the annual cost, which totals approximately £11,709,700 of repairing obligations and additional management costs associated with the Punch Estate which are the responsibility of the Borrower. The management costs are based on 7.5%. of the annual net contractual income for the Punch Estate. With regard to repairs and maintenance expenditure, we are advised by the Borrower that the budgeted cost for the forthcoming year is approximately £3,120,000.

We are advised by the Borrower that this sum represents the average in unrecoverable repair and maintenance costs that would be expected for such a portfolio. Guidance has also been taken from the estimate of the costs supplied by Fleurets and based on their inspections of the Punch Estate Sample. The annual cost of repairs amounting to £3,120,000 has been capitalised at the blended yield and the resultant figure has been deducted from the gross value.

In accordance with our instructions we have specifically not made any deduction for the cost of buying out the Carlsberg- Tetley Agreement since we understand this is dealt with elsewhere in the accounts of the Borrower. The Valuation set out below represents the value of the Punch Estate as a whole and does not represent the sum of the individual property values.

17.0 VALUATION We are of the opinion that the Market Value for the Punch Estate in its existing use, at the Valuation Date, subject to the assumptions and comments in this report is: £2,339,000,000 (Two Billion Three Hundred and Thirty Nine Million) Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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we make into the pub and the share of gaming income that we may have enjoyed from the pub. We do not have access to the pub’s books in the circumstances of either a new let or indeed an assignment. As has wrongly been suggested to this inquiry on an earlier occasion, we do not have access to the tenant’s books. Comment. It is a fact that virtually all Pubco leases state that copies of VAT returns and the annual accounts must be supplied on request, and so they do have access. Throughput volumes can have no bearing upon profitability and to suggest that it would have is deception at best, fraud at worst. (SEE END ATTACHMENT.) Q271 Mr Clapham: Mr Thorley, on that question of divulging to the person who is coming in the previous financial performance of the property, do you do that? Mr Thorley: Yes, we do and not only do we provide the volumes that we have provided, but we will also provide, and we do this at the same time as a rent review, a breakdown of our calculation of the rent, and it is in Appendix 3 in our submission, so you can see a clear breakdown of our expectation in terms of the volume, the gross profit on each product line and how the rent is calculated. Comment: I have not seen the Appendix 3 referred to but I would almost certainly guarantee, without sight, that the gross profit margins have not made an full allowance for pipe cleaning, line by line, or breakages or normal anticipated cash shortages or staV drinks all of which should be in detail in the supporting data. Also the wages will not be broken down in any form of realistic manning schedule, and neither will the operating costs. The price diVerential between the open market prices and what Punch charge will not have been included in the profit assessment or adjusted in the rent computation. Also neither will the extra take from the awp machines have been included in the profit assessment or the rent computation. The claim of giving full information is spurious. Q272 Mr Clapham: Given what we have said about the re-evaluation, have you had a re-evaluation carried out of your estate or do you intend to do that? Mr Thorley: We did as of the end of August and we actually reduced the value of our estate by just under £300 million, really more focused on the part of the estate which, we think, is struggling where the valuations are not sustainable. Comment: Above the answer to Q264 and footnote applies. The valuation of the estate is based not on the individual profitability of each pub but that figure plus all the other intangible income streams. Those other income streams should form the basis of an intangible asset valuation. By merging profit sources the tangible asset value can be inflated to justify greater borrowing. This is highly questionable. Q274 Mr Clapham: With regards to the rents, and this is a question to both companies, are you sort of changing any of the clauses that refer to upwards-only rent reviews? Have you still got upwards-only rent reviews? Mr Townsend: I think our position on upwards-only rent reviews is very widely known. We do not enforce any upwards-only rent review clauses in our business. There is no upwards-only rent review clause in any Enterprise agreement that has been issued since 1997. Comment: Not true! The 2006 Retail Partnership agreement includes in Schedule 3 provision for the rent to be increased annually by RPI and if the RPI falls then the rent remains the same. Mr Townsend: and, in every agreement that we have acquired since then, our Code of Practice overrides any clause within the lease, so, just to be very clear, we do not rely on an upwards-only rent review clause in any circumstances. Comment: But many rent invoices each month contain an a figure greater than the rent agreed at the last review because it does include RPI increases. Mr Townsend: Now, there are agreements which have that clause within them and that clause can be removed. There is a legal cost associated with that, I think one of the gentlemen from the trade associations mentioned it, and I can tell you that it costs about £500. Comment: A more realistic figure of £100 has been mooted. It is a straightforward “Deed of Variation” same words for every lease to say . . . the clause relating to upward only rent reviews and any annual increase in rent is hereby removed . . .. It can be duplicated by the hundred and all that would be required is the name of the pub, date of the original lease, date exercised, signed by a Director of the Pubco and lessee. The problem is that if the Pubco does this then it devalues its estate because without that Deed they can sell the property as being with having an annual RPI increase in rent. Mr Townsend: It is a straightforward legal cost to remove that clause from the agreement by deed of variation for ever. That can be done by anybody at any time merely on paying the cost associated with doing it. Any lessee, on renewal of their agreement, can also renew on to a new Enterprise agreement with no change to the commercial terms at all. Comment: It is absolutely essential that the clause is removed by Deed of Variation. Should a Pubco sell to another Pubco or even a property company, which has been done frequently in the past, that new freehold owner can say . . . the lease states UORR and RPI and we will apply …. and the tenant can do nothing! Mr Townsend: Again, completely contrary to the evidence that was given by an earlier witness suggesting that we try and negotiate wider conditions in return for removing, it is absolutely not the case. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Comment: There is proof to support that witness...butitwasrecommended that you do remove UORR, which includes RPI, by the T&ISC after six months of their investigation but you have not done this. Q275 Mr Clapham: Mr Thorley, can I just ask you the same question? Mr Thorley: if anybody wishes to have a deed of variation in relation to removing that for ever, I will happily make sure that we instigate that. Comment: But Punch have still included annual RPI increases in their new leases. Unless I am mistaken the RPI has never fallen which means that it will always go up. It should be removed totally from all leases by a Deed of Variation. Q276 Mr Clapham: It is interesting that you both have said, “As the re-evaluation has come about, we’ve seen downward rents, rents coming down”. Do you pursue a policy at all now to ensure that your tenants are in receipt of a living wage? Mr Tuppen: Yes, absolutely. Whenever we look at the potential for a pub, we always consider that there is no point in letting that pub at a level where the tenant cannot survive. There is absolutely no point in our maintaining a pub where it is impossible for the tenant to earn a decent living. Comment : To the best of my knowledge there is no evidence supplied to support that statement. Enterprise generally state in their lease3 that annual accounts must be supplied to them by their tenant as a condition of the lease. It should be possible for the Auditors of the company [so as to be independent] to aggregate all the profit and loss accounts for a given area such as South Wales, or Worcester plus Warwickshire plus Shropshire and give an average true profit and loss account which will show the true factual position of turnover, costs, rent etc culminating in an equation to see if the PRIME PRINCIPLE is observed and also if the average tenant[s] earn more than the national minimum wage assuming that all tenants work 60 hours per week. It may take a few weeks to prepare but it would supply the true and provable answer; and it would prevent the Pubco cherrypicking. Q277 Mr Clapham: Finally, given that you say you do not have access to the books, do you encourage your tenants to actually use given accountants or solicitors? Comment: See footnote 2. In the more current leases for Enterprise paragraph 23 says “within three months of the expiry of your trading or accounting year you must supply us with a copy of your trading accounts and . . . provide a copy of each vat return within one month of submission”. Q278 Mr Clapham: Mr Thorley? Mr Thorley: Yes, in our introduction to the new agreements on the first page, it sets out all of the advisers that should be needed for a pub and in relation to all new agreements they use a company called Milestone which provides accounting services specifically for pubs and again on a very favourable rate to make it as competitive as possible because we do not want to burden them with undue costs. Comment: So not only do Pubcos insist on having annual accounts submitted to them they even suggest the name of a firm that can produce them. Q279 Mr Clapham: So, if you have got pubs in my constituency out on that west side, I can tell my landlords and landladies that rents are coming down and they are going to survive? Mr Townsend: We can make it very clear that rents should be at the right level. It is completely counterproductive for us to “over-rent” a pub on any occasion. The primary objective is to make sure that the rent is the right rent for that pub and a sustainable rent for that pub, providing the lessee with a sustainable living. Comment: While he states Pubcos do not want to “over-rent” neither Enterprise or Punch will observe the ESSENTIAL FIVE Recommendations from the T&ISC which would enable the point to be proven. They cannot prove their statement and they clearly indicate that they do not support the PRIME PRINCIPLE. Q282 Mr Wright: Going back to the wet rents issue again, we have established that the pubcos do lease their pubs free of the tie, but can you just tell us what proportion of your business is free-of-tie? Also, what diVerential is there between rents? I think, Mr Thorley, you pull in £20,000 for a free-of-tie with an £8,000 rent and obviously £10,000 for the wet rent and £2,000 for the machine. Would that be the sort of 40% mark? Would that be possible? Mr Thorley: Yes, I have actually given the breakdown in our submission between the diVerent income streams, so it is roughly that. I can refer you to the page. It is actually in the summary on page 2. It is 44% rent, 50% beer margin and 6% machine, so that is pretty close in terms of the numbers. We have a couple of hundred pubs which are leased on a free-of-tie basis and they reflect the circumstances of those pubs, so we will take that into consideration where it is relevant in terms of the strategy of the pub.

3 In the more current Enterprise leases paragraph 23 says “within three months of the expiry of your trading or accounting year you must supply us with a copy of your trading accounts and ….. provide a copy of each vat return within one month of submission” SEE END OF DOCUMENT Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Comment. Mr Thorley has dogged the question. See Q214 and comments….. Thorley is suggesting that the sum of the wet rent and tied rent should equal the total rent, he appears to be advocating the PRIME PRINCIPLE which Tuppen Q212 disagrees with. But that is not what happens. That same pub he illustrated would make not £40,000 before rent but £30,000 as a tied tenant, they would take half, that is £15,000 rent plus the £10,000 from beer and awp, totalling not £20,000 as Thorley suggests but £25,000. That is where the deception lays. Punch are not taking the same as would a free of tie pub but more…. much more £25,000 instead of £20,000 and that £5,000 diVerence comes straight out of the tenants pocket. Using their own figures Punch take not 50% but 62.5%. The examples of odd pubs that may be Free of tie or restaurants are of no significance if the assessment is carried out properly and the Value analysis properly calculated. What has to be remembered is that when a pub is free of tie Punch lose the extra wholesale profit of about £100–120 a barrel. Q287 Mr Wright: So, if a potential tenant came to you and said, “Look, I don’t want this tied, I want this free-of-tie”, would that be oVered to him or would you say, “Sorry, but we’re not going to do it this way because we can see the potential for ourselves”? Mr Thorley: Well, I think the answer is that we would look at the circumstances of that pub and if it was suitable for that type of operation. Remember, as we were discussing earlier with Mr Bailey, we do see the business plans and we get an idea of what is happening, what is proposed in that pub and that will give us an idea. Comment: What Mr Thorley has not revealed is that if this were a pub that was doing 200 barrels the tenant would get in the open market about £100, whereas Punch would only give them £40 a barrel. It looks like there is a diVerence of 200 barrels at £60, £12,000 as a diVerence and that is what they may ask as additional rent if it were free of tie. The sting which they will not reveal is that if they let that tenant free of tie they would lose their extra wholesale profit. They get about £220! a barrel, usually give only £40 but if the pub was free of tie the tenant would buy elsewhere and then the Pubco would lose the wholesale profit of 200 barrels at [220–100] £120 % £24,000. Of course they will not let that pub go free of tie. Arguments of suitability will be balanced against that extra £24,000 they may lose. Q289 Mr Wright: Not just for that course, but overall. In other words, what is the diVerence between a tied pub and a free-of-tie pub in terms of the benefit that you would suggest that you give to them in terms of training and the whole package which they themselves would have to pick up if they were free-of-tie? [That is the question!!!] Mr Townsend: I am sorry, I am not sure I have completely got the question. We clearly provide an array of services and I think the Punch gentleman described the detail of some of the services that we provide. That is the whole emphasis of our business, it is what we do to try and help pubs be successful, so, whether you have got the regional manager as a business adviser with the investment we have put into regional managers in the last couple of years and the investment we have put into systems and tools to enable them to spend more time in pubs, we have got 30,000 quality business reviews which have been undertaken by regional managers in the last year and 8,000 property reviews by the regional property team. Now, we believe that is a very added-value service. There will be some protagonists to the tie who will say that the regional manager adds no value. Comment: If there were any value that could be attributed to the eVorts of regional managers etc then the value would pass into the profit assessment of which the Pubco gets half. Remember that Pubcos and Valuers generally project turnover and margins higher than those being achieved and costs lower than those being expended. The eVect is that the projected profit is substantially higher than being achieved or achievable. If the regional managers can help the tenants get towards the projected levels then the Pubco has taken a cut of profit before it has been achieved. Unfortunately no comparison has been supplied between what the tenants actually generate and the profit assessment for rental purposes says it should be making. Such a measure as previously mentioned is important in order to establish if there is any consistency between actual performance and opinion of what the performance should be, upon which the latter has been used to establish rent. The truth needs to be transparent! Mr Townsend: I am sorry, I cannot argue that with them on an individual basis, but we passionately believe in the tie and we believe that the services that we can provide can help pubs be more successful, and clearly we are going to continue to try to do that. Comment: He has not answered the question. A tied tenant will pay an amount for training that is greater than a free of tie tenant. For some courses the free of tie tenant will pay nothing. Mr Tuppen: One tends to go into outfits and smaller numbers. In numbers terms, we provide training and we provide a free rating service. Comment: Is it not true that the rating service uses valuers that a Pubco would use for either the capital or rental valuation of their pubs? Secondly how many of the members of the free rating service use turnover to argue rateable value on behalf of the tenant compared with the more correct legal methodology of actual profit? I would suspect that many valuers use the turnover method in which case the free service is in fact a burden to the tenant. As a matter of both fact and principle turnover does not mean profit, rent is equated to profit on a projected basis while rates are equated to profit using actual data. The erroneous use of turnover as the method can cost tenants thousands of pounds. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Q290 Mr Wright: I just think that is an add-on cost to a lot of the tied pubs which is probably unnecessary. Mr Tuppen: It is not just training, there are so many other things. What we can do, and I would be very happy to put this in a letter to you afterwards, are, for example, special buy-in deals where our licensees, because they are Enterprise licensees, at no kick-back whatsoever to us get things more cheaply than they could otherwise get them, so there are real benefits there. There are a whole series of things, and I would draw your attention again to the 2004 TISC conclusion which says, “The tie usually balances the costs and benefits available to tenants and the existence of the tie provides demonstrable benefits to both tenants and customers alike”. Comment: He is not correct. The answer by the T&ISC was given in their 178 and 179. The truth is that the T&ISC did not receive suYcient data to judge the issue that there was balance. The fact is that the costs and benefits are actually included within the profit and loss account and so if the profit has increased then the rent has increased. Not only has the tenant benefited, if indeed he has, but so has the Pubco. That is why 144 and 145 are so important. Without that detail to give transparency a lie can be perpetrated and hidden, as I believe it has been. That is why neither Punch or Enterprise can supply that “Value equation”. That is why 144 and 145 will not be accepted by Pubcos and that is why as a conclusion to this review freedom of tie is essential. Tuppen went on to say : I would very happily either find the appendix that went with that comment or perhaps give you an update to it so that you can get yourself more comfortable that there is real value because, I agree with you, if there were no value added, then the tie principle would be less tenable. Comment: The secret is that they get 50% of any improvement Enterprise deem to be possible in the future . . . even if it does not materialise! Q292 Responding to Mr Wright who dealt with a single brewer and the question of removing the tie. Mr Thorley: That single brewer would not have been willing to provide its competitors’ products. We are. Comment: Punch are a wholesaler as well as a Pubco. Mr Wright could have dealt with a wholesaler and still had the same benefits. Mr Thorley: Single brewer would not have been prepared to give a guarantee of supply for the remaining life of your tenure as secretary or for the life of the club. We are for the life of the lease. Comment: What poppycock. If Punch sell a batch of leases to another Pubco that claim is null and void!! Any new Pubco would efine its own suppliers and brands and Thorley knows that. Thorley: A wholesaler would not necessarily give you complete freedom in terms of your stocking. We do. Now, for an individual pub buying 200 barrels of beer a year, trying to deal to get the best market position which would logically be the number one products in each category,he has to deal with six diVerent suppliers or he has to sub-optimise and deal with a wholesaler. Comment: Punch would give £40 a barrel and a wholesaler for those six beers would probably give £100 a barrel or more. Thorley: Now, that is the diVerence that we oVer in terms of just the beer supply, so certainty of credit, certainty of terms, no minimum purchase obligations and guaranteed delivery on a 24-hour basis, six days a week, so we do provide a very significant service and we have put the infrastructure in. Comment: That is not entirely true. If a pub runs out and they deal with a wholesaler they can go anywhere and get supplies but with Punch if they go elsewhere they will be severely punished. Thorley: If the tie went, it would not be the individual pubs that would benefit, but, sadly, there are executives in Copenhagen or in Amsterdam or in Golden, Colorado or in Sa˜o Paolo who would be sitting there, saying, “Now’s our chance to reap more profit from the pub industry”, and they are not going to plough that back into the individual pubs, I am afraid they are simply not, whereas we have spent £300 million on our pub estate in the last five years. Comment: The probability is that if the pubs became free of tie they would get £100–120 a barrel, the wholesalers would be buying with a discount of £200 a barrel making £80 to £100 and the brewers would be giving £200 a barrel away instead of the £220 to 240. Everyone would benefit except the Pubcos, but then they have created their own problem. Brewers have been squeezed and that is why when Pubcos want more brewers just put up their wholesale prices so that Pubcos blame the increases on them. Q294 Mr Wright: What would be the eVect if the beer tie were removed? Mr Thorley said : 80% of our beer sales in the UK are still controlled by four major operators all of whom are foreign organisations, and they would simply redirect their eVorts into oV-trade promotions, their marketing eVorts, and you would see a significant reduction in the amount of inward investment into pubs. Comment: If the rents were fair and sustainable and the tenant could have a liveable income then there is every possibility that the tenants could carry out improvements. Mr Tuppen said: Were the tie to be removed, we would indeed become just straightforward property companies and, for a start, one would not see anything like the £9 million of support that we gave to our licensees in the past year, and Giles gave similar amounts. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Comment: If the rents had been fairer, and calculated in a manner that ensured transparency and a provable liveable income for the tenant, rather than the deceptive profit projections ensuring high income for the Pubco and slavery for the tenant, then the tenants would be self supporting. The Pubcos are squeezing harshly with one hand and oVering a crust with the other proclaiming the crust to demonstrate fairness, help and goodwill, which we can all acknowledge as true deception. Tuppen said: We have an interest in the success of the pub that is exactly aligned with those of our licensees and the reality also is that, if the tie were removed, there would be even more pub closures and there would be a significant reduction in choice for the consumer. Comment: This is his Opinion. The alternative is that local brands would flourish, people would become more interested in local beers, tenants would have a liveable income, provided 144 and 145 were mandatory, and many more pubs would survive….. but sadly Pubcos would not. Q296 Chairman: : The evidence on discounts is confusing and contradictory. We have heard particularly that supermarkets are passing on these discounts to consumers and, therefore, are undercutting pubs and the Association of Licensed Multiple Retailers give us completely diVerent figures on discounts? Mr Tuppen: We have eight human beings who are the regional managers who are so roundly pilloried the whole time and who spend their lives trying to help pubs. We can show you the discounts if you spend time with us. Comment: The eight RM’s have a job but the company policy is to ensure that the tied tenants are far worse oV than if they were free of tie. The tenants are justified in pilloring Regional Managers for what is rightfully theirs. The issue is that the tenants are not being treated fairly in a financial sense The T&ISC recognised that and that gave rise to the ESSENTIAL FIVE Recommendations in conjunction with the PRIME PRINCIPLE. Mr Tuppen does not accept the PRIME PRINCIPLE….. why? … because Enterprise cannot aVord to…. because the Pubco model is based on the principle that the tied tenant should be worse oV…. and then to make matters worse he will also not support the ESSENTIAL FIVE. The consequence of their obduracy is that the tenants are paying far too much for goods and rent… they are the ones suVering and because those so called “eight human beings” are toeing the Pubco line they deservedly get pilloried. Mr Tuppen and Mr Thorley cannot be brought into line voluntarily…. that was tried by the T&ISC….remove all the ties and make them observe and practice the ESSENTIAL FIVE. To do otherwise encourages their anti-competitive practices which are inexcusable. Q301 Mr Binley: the question is about the arbitration process and cost? Mr Tuppen said : But the solution lies in support, which we give unconditionally, for the BII proposal to produce a £1,000 fixed-cost professional arbitration system. Now, we support this entirely and we are working with them because, I do agree with you, if you are to criticise the arbitration process, we can aVord to pay £20,000 if we really feel strongly about it and the licensee cannot, and we have to change that process. Comment: Here at last is a part of the truth. Pubcos can bear the cost of arbitration but tenants cannot aVord to. Pubcos can use their strength to pressure tenants into submission. However it has to be recognised that neither the BII, Giles Thorley or Ted Tuppen support the Prime Principle or the Essential Five T&ISC recommendations. The collusion between these parties is tantamount to a recipe for corruption and that coupled with the existing stranglehold of RICS and would be to the total detriment of the tenant. Removal of all supply ties, enforcement of the essential five recommendations and removal of the arbitration process from RICS to either a new team/panel comprised of the three disciplines or to the Chartered Institute of Arbitrators provided that they are not members of RICS could provide a solution. Q307 Mr Binley: Now, how much do arbitration cases cost and who bears the cost. Comment: The ultimate problem with arbitration is that none of the arbitrators or independent experts accept the Prime Principle or the Essential Five recommendations; That means that the outcome of any arbitration cannot possibly be fair. The tied tenant will always lose out. As for cost the Pubcos could be £20,000–£30,000, the Arbitrator £10,000 to £15,000 and the advisor for the tenant £15,000 to £20,000. The cost split 50/50 could be £25,000 to £30,000 but it could be that the tenant is saddled with the total cost for both parties, £50,000–£60,000 and then they go bust. BELOW:

REFERENCE Q270 THE FOLLOWING IS AN EXTRACT FROM A RECENT PROPOSED ENTERPRISE LEASE

23. Accounts 23.1 Within three months of the expiry of your trading or accounting year you must supply us with a copy of your trading accounts (including reasonable evidence of turnover) for the Business for the year in question and notify us of any changes in the dates of your accounting year. 23.2 You must provide us with a copy of each quarterly VAT return for the Business within one month of the date of submission required by HM Revenue & Customs. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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THE FOLLOWING IS A DETAILED ANALYSIS OF INFORMATION CONTAINED IN THESE TWO COMPANIES PUBLISHED FINANCIAL STATEMENTS

Punch Taverns plc Compare 2007 with 2008

Punch financial report shows: 2007 2008 Value of estate 6.703b 6.467b Number of pubs 9,064 8,442 Average value per pub 739k 766k 3.6% increase DEBT 4.923b 4.852b Av Debt Per Pub 543k 574 a 5.7% increase Leased Pubs Av for year 7,873 7,572 Leased Pubs at year end 7,561 7,572 Value of leased estate same 5.441b Av value per pub 719.6k 718.6k Leased Debt 3.673b 3.602b Av Debt per pub 485.8k 475.6k Total rent 235.0m 233.1m Total awp 25m 25m Total liquor 287m 285.6m Per pub: Guess at av brl per pub 180 180 Av Rent 30.0k 30.8k Av awp 3.2k 3.3k Liquor as wet rent est 12.6k 14.4k Liquor as wholesale profit 23.9k 29.3k Average pub profit as owner/occupied based on Punch estimates And free of tie [APPOOFOT] 75.8k 79.3k Ratio debt to APPOOFOT 6.4times 6.0 times Ratio Value to APPOOFOT 9.5times 9.1 times Shareholders funds 1.737b 1.930b est Av Shareholders funds P P 191.6k 228.6k % of share funds/property 25.9% 29.8% Possible overvaluation Of property per pub 341.1k 325.1k Enterprise Inns plc Comparison of 2007 results with 2008 Value of estate 5.710b 5.859b Number of pubs 7763 7763 Average value per pub 735k 755k 2.7% increase DEBT 3.806b 3.802b Av Debt Per Pub 490k 490k Total rent 254m 253m Total awp 25m 25m Total liquor 352m 351m Per pub: Guess at av brl per pub 200 200 Av Rent 32.7k 32.5k Av awp 3.2k 3.2k Liquor as wet rent est 14.0k 16.0k Liquor as wholesale profit 31.3k 29.3k Average pub profit as owner/occupied based on Enterprise estimates And free of tie [APPOOFOT] 82.6k 84.2k [average pub profit owner occupied free of tie] Ratio debt to APPOOFOT 5.9 times 5.8 times Ratio Value to APPOOFOT 8.9 times 9.0 times Shareholders funds 1.483b 1.548b est Av Shareholders funds P P 191.0k 199.4k % of share funds/property 25.9% 26.4% Possible overvaluation Of property per pub 322.1k 336.8k Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by Kossway Ltd

Executive Summary 1. Kossway are the third largest independent supplier of gaming and amusement machines in the UK. 2. In the past 10 years, the large pubcos have been introducing new leases in their tied estates under which tenants are no longer allowed a free choice of machine supplier but are obliged to choose from a list of suppliers nominated by the pubco. 3. Admission to the list of nominated suppliers is not based on objective criteria but on the obligation on the supplier to pay substantial ongoing fees to the pubco, resulting in an inflated cost to the pub tenant. 4. The operation of this tie in respect of machines results in tied tenants having to pay machine rentals that are substantially in excess of the prevailing open market. 5. The operation of the tie tends to foreclose the market for machines by restricting access to tied pub tenants who form an important sector of the licensed market. 6. Pubcos should not be permitted to tie tenants for goods and services other than beer and other drinks.

The current situation regarding supply of gaming and amusement machines to the main pubco retailers Kossway serve approximately 1,200 outlets with 4,000 machines. Aside from ourselves, there are in excess of 150 supply companies engaged in similar supply, of which I understand no more than 20% are nominated to the supply of the pubco retailers. Kossway supply approximately 40% of their business to the free-trade, managed, and tied public house sector, and are not nominated suppliers to either of the two large pubco retailers, Punch and Enterprise, despite having applied for nomination. No reason has been stated as to why Kossway’s application was not accepted. It is understood that the nominated suppliers have experienced a squeeze of their margins due to the greed of both Punch and Enterprise, who have demanded increased fees paid to themselves in return for allowing the suppliers access to their tied estates. However it is unlikely that those suppliers will in themselves complain as by so doing they will clearly put their reselection at risk at the next review carried out by the pubco concerned. As a result of the restricted nominated supply arrangements introduced, Kossway has suVered a loss of business. In nearly every case where Kossway has been required to remove its machines from a public house, it has been against the wishes of the tenant concerned. Tenants have been forced to accept the pubco nominated supplier as a fait accompli, with no other choice but to conform.

Previous history As a result of the 1989 Beer Orders, large brewers were required to divest themselves of a large number of tenanted houses. Following on from this, most of the large brewers sold oV the bulk of their pub estates, which now form the bulk of the Punch/Enterprise estate. The pubcos inherited a portfolio of leases varying between 10 and 20 years. Most of these long leases allowed tenants to choose their own machine supplier, subject to the landlord’s consent, such consent not to be unreasonably withheld. Accordingly, under these long leases, the machine supply market operated fairly allowing generally for open access and free competition. This gave both the machine supplier and the tied tenant equal opportunity in the market to negotiate supply terms on a competitive basis having regard both to cost and standards of equipment and service. This situation prevailed in most cases throughout the 90s and was entirely reasonable. However, as the pubcos have grown and particularly Punch and Enterprise, they have introduced new leases and taken every opportunity to convert tenants onto the new, more restricted leases. It is understood that in the case of both Punch and Enterprise, 75% of their combined estates are under these new more restrictive leases. The remaining 25% of tenants still operate under the old leases but the number is falling as the pubcos continue to exert pressure to force tenants on to the new leases. Punch and Enterprise control over 8,000 pubs each. Out of a total of 16,000 pubs, Kossway understands that in excess of 12,000 of those pubs are operated under the new leases.

The new lease terms, the royalties or payments paid by the nominated supplier via the tenant to Punch/ Enterprise The pubco new leases provide for a nominated list of machine suppliers. Tenants are no longer able to choose a supplier outside that list. Furthermore, the pubco sets a “rent list” applicable across their estate for each supplier for pub-type gaming machines. This rent list is formed on the basis of a diminishing rent as the machine becomes older. The rent charged is high and applied per gaming machine sited and this rent also includes a royalty to be paid to the pubco. (It is not transparent to the tenant but included in the overall rent to pay for the machine). In the case of Enterprise, the supplier has to pay approximately £24.00 per Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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week royalty to the pubco for each gaming machine installed. In the case of Punch, the supplier pays £15 per week for each gaming machine supplied into any one of its locations. Further, from the net take of each gaming machine, after VAT, licence fee, rent and nomination payments, in the case of Enterprise 35% of the remaining machine income is paid to Enterprise and in the case of Punch 50% of the remaining machine income is paid to Punch. Suppliers are eVectively controlled by the pubco and are required to provide collection staV to empty the machines to ensure there is a full papertrail of data to support not only the rent and royalty payments but also the pubco’s percentage of the machine income cut Pubcos are, in eVect, receiving a double payment in respect of the same space. The tenant has already paid for the space occupied by the machine in his lease. The pubco is then charging the tenant a further rent on the same space by way of royalties and income share received from the machines. Tenants initially agree to this restrictive and unfair practice but I consider this to be force majeure as a potential tenant has no option but to sign if they wish to run their own pub as a business.

The restrictive and anti-competitive situation as a result of the new lease nominated supply arrangements with regard to those tenants aVected In eVect, the pubco is operating an anti-competitive and, I believe, an illegal tie. The tenant is locked into the lease with the imposition of an exclusive tie for beer and usually other drinks. The pubco is exploiting that dependence by extending the tie to other goods and services unrelated to the core business. What is there to stop a pubco extending this tie to food, cigarettes, or even cleaning or maintenance services? Pubco tenants are seriously disadvantaged by the imposition of the machine supply restriction imposed by the new leases. Tenants of tied pubs should be free to operate without interference from pubcos outside the provision of the premises and the purchase of beer and other drinks. Whilst it is not my business to comment on the success of both Punch and Enterprise as trading companies, I think it’s fair to remark that they are very profitable and that the income generated from machines represents less than 10% of their overall profitability. Their machine income in my view is a greedy lucrative side income that they are loathe to forego. The financial tables I submitted to the TISC enquiry in 2004 (and were published) clearly show that the income lost by the tenant from their machines in the payment of machine royalties and further income share to the pubcos is substantial and probably accounts for 20% of the tenant’s annual living income. How on earth can this be fair or reasonable?

The restricted and anti-competitive situation as a result of the new lease arrangements against existing and potential suppliers of the tenanted estates Additionally, there is clearly an unfair exclusion of suppliers who are not approved and nominated by the pubco retailers. I believe this is a restrictive issue. Whilst the pubcos may well argue that there is ample selection amongst those nominated suppliers available for choice by the tenant, it clearly is restrictive: both Kossway and approximately 120 other suppliers are prevented from supplying such tenants, despite the fact that they may oVer the tenant a better deal, better standards of supply, and better equipment at more competitive terms. The foreclosing eVect of the machine supply restrictions are substantial and as the Business and Enterprise Committee are doubtless aware these are tenanted pubs and are a distinct and separate market from managed pubs.

The justification and reasons given by the pubcos for their new lease nominated supply arrangements Both Punch and Enterprise attempt to justify their restrictive nominated supply arrangements in respect of gaming and amusement machines by stating that they are working in a business partnership with their tenants, ensuring they are only supplied by reputable suppliers and aVording the tenants their expertise via their machine control departments. In addition, they also seem to refer to a notional allowance and discount from the true value of the rental of the pub in consideration of participation in the profits of the gaming and amusement equipment. There is no evidence to support this argument. In fact, within the restrictive new leases, it is not mandatory to have gaming and amusement machines installed at all, and I understand that, if a tenant decides not to have machines installed, it would make no diVerence to the rental charge for the pub, proving (a) there is no actual discount in consideration of machines being placed in the pub and further proving by inference (b) gaming and amusement machines installed are not core to the pubco retailer’s activities in renting the pub to the tenant and supplying beers, spirits and other drinks. The operation of the machine supply restrictions are simply in place to enable the pubco to further profit with little or no assistance to their tenants. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Punch and Enterprise claim that their strict control and machine department is assisting the tenant. Are they saying on the one hand that the tenant is either too stupid or incapable of selecting the best terms for themselves for their gaming and amusement machine requirements as, on the other hand, they are happy to enter into their “business partnership” with those tenants in the general running of their pubs. If so, this is not true. If a tenant is deemed fit and proper to run a pub and promote the sale of beers, wines and spirits to the best of his ability, to maintain and keep that pub and pay the rent, then surely he must be deemed as capable of making a simple decision as to whom he wishes to supply his gaming and amusement machines and at what terms. The pubco’s claim that they provide assistance to the tenant is nonsense. Their real objective is to gain as much income as they can get away with from the gaming and amusement machines sited throughout their tenant’s estates. Punch and Enterprise also state that their total control ensures that the suppliers are of a credible status. Every supplier of gaming machines in the U.K. is subject to a vetting and certified authorisation from the Gambling Commission (previously the Gaming Board for Great Britain). Even among those nominated and approved suppliers, the pubcos further state that good practice standards from the supplier will be observed by the manner in which they control their approved and nominated suppliers. I totally refute this as it is expressly forbidden by the pubco retailers that those nominated suppliers be allowed to market into tenant’s pubs they do not already supply. The existing nominated suppliers are not allowed to oVer any better deal, better standards of operation, increase or remove the amount of equipment, or market in the best interests of the tenant, without the express consent of the pubco retailer machine department. In other words, it’s a closed shop. Surely this must be working against the interests of the tenant and be deemed a restrictive practice.

Proposals for the Future I respectfully request that the Business and Enterprise Committee recommend that legislation be introduced to prevent the introduction of ties for products and services other than beer and other drinks. If the Business and Enterprise Committee agree with my recommendation but feel that legislation is not a short-term practical mechanism at this point, then all members of parliament involved in the committee should be encouraged to sign an Early Day Motion, which could be phrased as follows “That this House believes that pubco retailers aside from renting to their tenants pub premises and participating in the supply of beers, wines and other drinks should cease their restrictive supply clauses in respect of non-core products and services, ie food and/or gaming and amusement machines to the benefit of those tenants and consumers”. I believe that an Early Day Motion signed by those MPs in the Business and Enterprise Committee who are in agreement would be expanded on greatly by other members on both sides of the House. I further believe that individual tenants would gain further support from their local MPs to a point where pubco retailers would have to take notice or else the enactment of legislation would quite fairly and reasonably ensue. Further, any supplier duly certificated by the Gambling Commission should be entitled to supply a tenanted pub if that tenant in his judgement decides it is in his best interests so to do. If the above proposals I put forward are implemented, I believe this will result in: (a) A fair deal for the tenant. At the moment it is totally unfair with Punch and Enterprise extracting extra profits from the gaming and amusement machines. (b) A competitive free enterprise marketing structure and proper freedom of choice to the advantage of the tenant. (c) A normal and open business structure for the benefit of all suppliers across the UK, giving them equal opportunity of supply on the merits of the standards of operation of that supplier. When combined, all of the above proposals will lead to a fair and non-restrictive and competitive market place for the benefit of the tenants, the supplier, and ultimately the consumer.

Conclusion The 1989 Beer Report gave rise to a change in legislation that prevented the control that brewers had over tenants through a monopoly from continuing, and that legislation was designed to protect the rights of tenants and their ability to earn a decent living. The Beer Orders in particular prevented pubcos from applying purchasing restrictions or ties for products or services other than beer and other drinks. The new lease arrangements of both Punch and Enterprise are a return under a diVerent guise of those same feudal and baronial terms and conditions working so unfairly against those tenants concerned and in particular in regard to gaming and amusement machines. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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If Punch and Enterprise maintain that the restrictive conditions of their new leases in regard to gaming and amusement machine supply is to the benefit of the tenant, then that tenant should be able to decide for himself whether he wishes to use the pubco retailer’s restrictive approved nominated supply system or not and, given freedom of choice, it is extremely unlikely that tenants would wish to continue under the existing restrictive conditions imposed in the new leases. The pubco enters into a lease with their tenants, not a franchise. The 2004 TISC conclusion clearly stated: “In our opinion, pucbos do not add suYcient extra value from their deals to justify their claims to 50 percent of the takings from AWP machines. We remain unconvinced that the benefits of the AWP machine tie outweigh the income tenants forgo and we recommend that the AWP machine tie be removed.” 29 September 2008

Memorandum submitted by Karl Harrison

Introduction 1. I have been a licensee in the London area since 1992 and have been involved in the successful ownership and operation around 25 bars, pubs, restaurants and clubs in that time. At present I own and operate five units, one of which is tied to Enterprise Inns plc and one of which is tied to Mitchells and Butler plc through its franchise business. 2. I am a founder member of the Westminster Licensees Association and I am a member of City of Westminster’s Entertainment Forum as a representative of licensed trade. 3. I understand that in 2004 the Business & Enterprise Committee conducted an inquiry into those property companies calling themselves “Pub Co’s” and including, inter alia, Enterprise Inns plc, Punch Taverns plc etc. 4. I understand that the Committee at that time made certain recommendations as to how these companies should moderate their behaviour and with the intention that the Committee would return to the issues at a later date with the current review being the result of that process.

Market Overview and Pubcos 5. Over the past 15 years or so the number of pubs in the UK has contracted by up to 10% but the ownership profile has changed greatly. The 1989 Beer Orders were intended to remove the dominance and control of the brewers over the pub sector. In fact what happened was that the loopholes in the legislation were exploited by venture capitalists and accountants to create the large freehold pub estates in the hands of property companies now known as “pubcos”. These property companies now own more pub freeholds than were owned by the brewers. This is a significant legislative failure which should be addressed. 6. In practically all examples the “pubcos”—which interestingly now include many brewers—own pub freeholds but actually operate no pubs at all. The pubs are let or leased out, usually at high rents, to tenants that are often ill-informed, ill-resourced or very often, both. The tenants then have to purchase some or all of their wholesale drinks supplies from the “pubco” acting as an intermediary at prices that are very much higher than the prices at which the tenant could otherwise buy the drinks in the open market. We operate both tied and free-of-tie premises and know this to be true. 7. In its previous inquiry the Committee stated that “the cost of beer ties are usually balanced by the benefits available to tenants”. This is untrue and I cannot imagine what evidence could possibly have been presented to justify such a statement being made. The business I own that is tied to Enterprise Inns plc would be better oV by a six figure sum each year were I were able to buy beer in normal market. We receive no tangible or intangible benefit from being tied to Enterprise Inns plc. 8. It was a principle established in the inquiry in 2004 that the tied tenant should be no worse oV than if they were free of tie. Given the above and further evidence I shall present further down, it is very diYcult to see how this principle holds at present for my business tied to Enterprise Inns plc. 9. The “pubcos” claim that they provide support through so-called Business Development Managers. I have met several of these BDM’s and have yet to meet one who has any meaningful experience at all in direct management in the licensed trade. The meetings with BDM’s usually consist of the tenant being shown how much beer they have bought from the “pubco”—information which of course the tenant will already have. 10. It is a well known that a great many pubs are now closing or will do in the coming months as the economic slowdown beings to bite. The “pubcos” and the BBPA will consistently blame factors such as “the smoking ban” and “supermarkets” for this phenomenon. In reality the vast majority of closures will be down Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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to undercapitalisation, underinvestment and loss of profitability. A great many pubs that are closing will be tied to the main “pubcos”. Both major “pubcos” admit to needing tenants for 10% or more of their estate. Anecdotal, and including those in distress, it is likely to be many more. 11. The “pubco” model has not been through a period of serious economic downturn or recession such as we are likely to now experience. The “pubco” model starves small businesses of cash and profits that will be needed to survive in a downturn. In the free of tie market pubs can generate profits of between 100% and 300% more than in the tied sector. In the pub sector, with high gross margins but high costs the net profitability is often low in any event and a relatively small fall in sales can erode all profits from a pub. It does not take too much to realise that if a pub has low profits in good times because of the tie then it will be under unsustainable pressure in a downturn and if its owner cannot carry losses then it will close. We will see this downturn take its toll much more heavily from “pubco” tenants who do not have the profits available in free houses to cushion them.

British Beer and Pub Association

12. The BBPA is an entirely partial organisation that claims as follows on its website: The BBPA is the leading organisation representing the UK beer and pub sector. Our members account for 98% of beer brewed in the UK and own more than half of Britain’s 58,000 pubs. Beer is Britain’s national drink, and pubs are the home of hospitality in the UK. These major national industries are a much-loved part of our culture, and employ over 600,000 people, as well as sustaining many other UK businesses. 13. The above is carefully worded. There membership includes most brewers and most of the “pubcos”. They may ‘own’ 50% of Britain’s pubs but they operate very few of them. The sector may employ 600,000 people but their members do not. The BBPA has no right at all to position of doing so in the media it only. The committee will no doubt be appraised of this matter elsewhere.

Royal Institution of Chartered Surveyors

14. Members of the RICS are generally charged with providing the guidance as to how pubs are valued and how rent reviews are resolved. The RICS generally provides members of its institution to act as third parties to settle rent reviews. Much of the RICS guidance relating to pubs is steered by the Trading-related Valuation Group. The Chairman of that group is Rob May MA FRICS with “special expertise in the valuation and licensing of pubs”. I understand that Mr May is an employee of Enterprise Inns plc and he has long been a consultant to that company and the Unique Pub Company which was acquired by Enterprise Inns plc. It is very hard to imagine that there is not a conflict of interest here.

The Beer Tie and Pricing

15. The “beer tie” is the mechanism by which tenants of brewers were forced to acquire their beer from the freeholder of their pub which was the brewer. The 1989 Beer Orders were intended to remove this ill- placed dominance and control. As previously mentioned the legislation failed to do that and at this time the “pubcos” have assumed the dominant controlling position previously occupied by the brewers. “Pubco” tenants are compelled to buy their wholesale product from the “pubco” at prices far in excess of those in the open market and for the term of the lease. 16. I have set out below a comparative table to show the diVerence in pricing that exists between one of my free of tie businesses and one of my tied businesses. In both cases the products are provided by Scottish & Newcastle (Heineken):

Prices from Enterprise Inns to tenant

Product per per pint retail net GP net cash margin/pint Fosters 101.72 1.16 3.20 57.56% 1.57 Kronenbourg 118.82 1.35 3.50 54.67% 1.63 San Miguel 116.87 1.33 3.50 55.41% 1.65 Heineken 122.63 1.39 3.50 53.22% 1.59 Guinness 110.75 1.26 3.50 57.75% 1.72 Strongbow 99.70 1.13 3.30 59.66% 1.68 St Austell Tribute 80.27 1.11 3.30 60.30% 1.69 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Prices Direct from Scottish & Newcastle to tenant

Product per keg per pint retail net GP net cash margin/pint Fosters 70.69 0.80 3.20 70.50% 1.92 Kronenbourg 87.81 1.00 3.50 66.50% 1.98 San Miguel 89.30 1.01 3.50 65.93% 1.96 Heineken 96.38 1.10 3.50 63.23% 1.88 Guinness 87.22 0.99 3.50 66.73% 1.99 Strongbow 68.85 0.78 3.30 72.14% 2.03 St Austell Tribute 69.39 0.96 3.30 65.68% 1.84

17. From the information supplied above in 16 it can be simply seen that there is a very substantial discrepancy between the retail opportunities available to tied and free of tie tenants respectively. Prices per keg across real ales, lagers and ciders can be more expensive to the tied tenant by as much as £31/keg, or over £100/barrel or £0.35/pint at cost. This places the tied tenant at a severe competitive disadvantage to those pubs that are free houses. 18. The “pubcos” will say that the rents levied on their tenants are less than those that might be borne by a free of tie operator. This is simply untrue and is discussed more fully in the section below on Rent Reviews. 19. The “pubcos” will say they oVer a discount. Enterprise Inns oVer a sliding scale of discounts up to a maximum of £42.12/barrel for tenants with volumes over 500 barrels for annum which is a considerable volume for an average pub and not achieved by most. The sliding scale is as follows:

Annual Qualifying Purchase Discount Per Barrel 0–150 0 151–200 14.04 201–250 18.06 251–300 22.05 301–350 26.07 351–400 30.09 401–450 34.11 451–500 38.11 501! 42.12

This discount oVer is very much below that which can be readily realised in the open market by an average operator. It should also be pointed out that the discount oVered above only applies to the number of barrels shown in at each level. For example, should you purchase 540 barrels of beer then the maximum discount is applied only to the last 40 barrels purchased. The total discount paid would be £10,811.30. Should the maximum discount be of £42.12 be applied to the whole volume—as of course it should and as is done by direct suppliers—then the total discount paid would be £22,744.80. This is a significant diVerence to a small business but not even this amount is oVered by Enterprise Inns in this example.

The All Party Parliamentary Beer Group

20. The largest of the all party parliamentary groups, this group is, to my knowledge, the largest of such groups with 350 members. It purports to take an objective view of the beer and pub sector and yet it is funded and eVectively managed by its patrons, the brewers and “pubcos”. Its chairman, John Grogan, MP for , is well known for previously having written articles for Enterprise Inns’ in-house magazine, being remunerated at a rate of around £200 per article. As for my comments in relation to the RICS above, it is hard to imagine that the members of this group are able to achieve a wholly objective and impartial view.

Has the Licensing Act 2003 had an eVect on the competition within the Market

21. Local authorities have in some cases formulated quite restrictive policies on licensing which has limited the actual extent and impact of the new act in many areas. Notwithstanding that fact most pubs have found it relatively simple to extend their licensed hours to midnight during Monday to Thursday and a little later on Friday and Saturday. This has resulted in a negative impact on those operators with late night venues that were reliant on traditional pub trading hours turning large numbers of customers onto the street after 11pm and who would still be prepared to pay admission fees to enter late night venues to continue their evening. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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22. I would contend that the greater flexibility in licensing has had an overall benefit to pubs in terms of helping operators to more easily manage customers and to make closing time a less strenuous aVair. It was never a good idea to close at 11pm and then to tell people to drink up in 20 minutes before making them leave the premises. For those operators that have chosen to extend hours to midnight or so the process of closing is better for customers and management alike. 23. There is a possibility that with the current downturn, the cost of the operation of extra trading hours for little financial benefit may place pressure on the finances of some pubs.

Codes of Practice 24. I have notice no eVect or implementation of any Code of Practice. Only now as I face a forthcoming rent review have I even see a copy of a document entitled Code of Practice—The Letting and Operating of Leased and Tenanted Pubs. I have been told that this document is prepared by the BBPA and the “pubcos” and so it is no surprise at all in reading it to see that it simply seeks to reinforce the existing operation of the “pubco” model with little or no recognition of the interests of the tenants. 25. The Code of Practice is apparently endorsed by the British Institute of Innkeeping although it is very unclear as to what purpose such nepotistic “rubber-stamping” should serve. The BII does not operate pubs and does not represent publicans so who is it endorsing the code for? The Code I have seen is, frankly, questionable. Take the section on grievances for example. This advises that a tenant should take its grievance in the first instance to the company (“the pubco”) with which it has the grievance and beyond that implies that a third party could be involved if both parties agree. The “pubco”, a property company, want that third party to be a member of the RICS, whose members largely represent, of course, property companies! 26. In truth, the ‘pubcos’ know, as I do, that a lease is a contract in property and that document is an entire agreement not subject to outside influence except where specifically provided for in the document or elsewhere by the Court. Unless it is made so by statute the Code of Practise is not going to be binding on either party to the lease.

Machine Tie 27. The position regarding the Machine Tie remains as inequitable now as it was in 2004 when the inquiry concluded that it remained unconvinced of the benefits of the tie. There is little, if any, transparency regarding the sharing of the revenue and the true cost of the tie to the tenant. The tenant is certainly not able to have direct access to details of the revenue that is actually taken from the machines and has to rely on information given by others. There is considerable scope for “leakage”. 28. The “pubcos” take 50% of the machine income but as the income is also included in the calculation of profit used to set the rent then the “pubco” will eVectively take a share of 75% and this is totally unfair and further evidence of the contempt in which the “pubcos” hold their tenants. 29. Additionally, many “pubcos” charge machine suppliers a “royalty” (or kickback as it is more usually known) for being on the approved list of suppliers. This money is pocketed by the “pubco” in addition to the share of income from the machine and is not used at all, as some “pubcos” claim to subsidise machine rents which are much higher through the “pubcos” than in the open market. The same as for beer as previously demonstrated. Why, you will no doubt ask yourself, should a tenant pay over the odds to rent a machine when it then has to hand over 75% of the takings to the landlord?

Rent Reviews 30. Much has been made by the “pubcos” of the fact that their rents can go down as well as up. My lease with Enterprise Inns contains an upward only rent review provision and even though we now face a rent review, there has been no mention from Enterprise of any attempt to remove that provision. I do not believe at all that the “pubcos” have any intention of honouring the commitment regarding rent reviews as the UORR provisions are enshrined in the UK commercial property system and probably form an intrinsic part of the “pubco” business model. 31. The rent review model for pubs is deeply flawed in that it is based on a calculating a divisible balance split 50/50 between landlord and tenant, removing the “pubcos” eVectively from the normal laws of supply and demand that apply to every other part of the property market. Interestingly,bars and restaurants, selling the same products as pubs and competing in the same market, have rents calculated entirely diVerently and on the basis of per square foot comparables. The rent review clauses in my lease with Enterprise are no diVerent to those in my free of tie leases and yet Enterprise want to use method to which no reference at all is made in my contract with them. We intend to test this in Court. The current system fails to take account of the standard disregards in relation to goodwill that are explicit in the contract. The system I have seen used in the pub sector for tied pubs results in rents that can be as high as 15% of more of the tenant’s net sales. In my experience in the free of tie sector we operate usually with rents that equate to around 10% or our net sales. A lot of tenants are subjected to financial intimidation by the ‘pubcos’ such that they feel unable to involve a third party to determine the rent review. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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The Rating System 32. The current system of arriving at rateable values for pubs was “agreed” by the Valuation OYce, the BBPA and a firm of surveyors acting for the main “pubcos”. Neither the BBPA nor the “pubcos”—neither being pub rate-payers, or representatives of publicans had any right to “agree” anything with the tax authorities on behalf of the pub sector and this position has recently been supported by the Court. The Valuation OYce is very guarded on this issue and we are challenging them in the UK courts and at the European Commission. 33. The system relies on the VO requesting detailed trading information from the rate-payer and then applying a percentage to the sales that are revealed in order to arrive at a rateable value. The higher your sales, the higher the rateable value so quality operators are disadvantaged and can end up paying rates for the same property that are far higher than those paid by a poor operator. The system purports to relate to the same system as used in rent reviews but in fact the system has been manipulated by the “pubcos” and their representatives to enable low turnover “pubco” tenants to pay less rates whilst allowing the “pubcos” to charge higher rents for the same property eVectively disengaging the pub rating system from the law. EVectively, the tax payer is subsidising the “pubcos” rental stream as were the law to be applied properly then many tenants could not aVord to pay the “pubco” rent as well as rates based upon that rent. The rating system for bars and restaurants, selling the same product and in the same market relies on the rateable value being based on the rent as provided for in the Local Government Finance Act 1988 upon which the rating system is based.

To What Extent have the Pubcos met the concerns of the Committee from the 2004 Inquiry? 34. I would say that with the exception of lip service being paid to the Committee through the Code of Practice, the “pubcos” and their representatives and lobbyists have worked hard to avoid changing anything and to ensure that it was “business as usual”. 35. The only thing starting to compel the ‘pubcos’ to take a diVerent approach at the current time is that the city, city analysts and financial journalists are rightly starting to question not only the “pubco” model but also the precarious financial structure that lies behind them, based on high debt and good times. The current downturn might force them into commercial changes but this should not prevent the Committee from subjecting the “pubco” industry to further scrutiny.

Is further Regulation required? 36. The Committee should make the necessary recommendations to initiate legislation that will remove the beer tie from the pub industry. 37. The Committee should make the necessary recommendations to initiate legislation that will remove the machine tie from the pub industry. 38. The Committee should recommend an investigation into the calculation of pub rents using the Profits Method and including an investigation into the role of the RICS. 39. The Committee should recommend an investigation into the agreement reached by the Valuation OYce, the BBPA and the surveyors acting for the “pubcos” in relation to the rating system as applied to pubs. 40. The above will have a positive eVect on the entire pub sector and the same for the independent brewing sector releasing back into the pub sector’s economy the hundreds of millions that is currently sucked out by property speculators otherwise known as “pubcos”. 41. The main beneficiary of the above will be the public at large whose pubs will see further investment and improvement and competition. 29 September 2008

Supplementary evidence submitted by Karl Harrison This information is submitted further to my main evidence to the Committee submitted previously. This matter is, I believe, highly relevant to the considerations of the Committee in relation to the conduct of “pubcos” in connection with rent reviews and the supposed application of a Code of Practise. In addition to other pubs I am the tenant of a pub in Ashtead, Surrey, known as The Leg of Mutton and Cauliflower. This pub has been in operation in the town of Ashtead since the 18th century. The freeholder and “pubco” in this instance is Mitchells and Butler. I have a 10 year lease at the premises from 21 November 2003. There is provision in the lease for a rent review on the 29 of October 2008—this year. My passing rent is £48,000 per annum plus a further sum equivalent to 3% of my net sales. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Mitchells and Butler, I understand, are members of the BBPA and I further understand that they have subscribed to the so-called Code of Practise—The Letting and Operating of Leased and Tenanted Pubs. In or around 29 of September I was contact by Mitchells and Butler and asked to attend a meeting to discuss the rent review. A meeting was arranged for 10am on 7 of October and I duly attended the meeting which was with an area manager employed by Mitchells and Butler. The area manager explained to me that sales were down on the previous year and that Mitchells and Butler were not making enough money out of me and they wanted to get a much better rent at rent review. He explained that his property department had told him try to “get a figure in the high sixties”. By this I took him to mean a sum in excess of £65,000 per annum on the basis rent plus the 3% of turnover. This would imply an increase of around 40% over the current rent. An increase of 7% per annum compounded. Over three times the rate of inflation for the period concerned. I asked the area manager to show me the basis for such an increase given that the pub on the other side of the street, managed by Mitchells and Butler had all but closed down. He said he would be using other comparables. I said I thought that they carried out rent reviews by reference to a profit and loss account and a divisible balance. He told me that such an approach wouldn’t work for them in this case so they would have an agent look for comparables. I said I thought the Code of Practise tried to provide for downward movement as well as upward and surely the current climate ought to be reflected. I was told it was an upward rent review only and that they didn’t want to mess around talking about it but wanted to just get it oV straight away to a third party to decide if I didn’t agree with what they wanted. The area manager conceded that Mitchells and Butler applied the Code of Practise to rent reviews but he had not sent me a copy and did not have a copy with him. No evidence whatsoever was presented to support the level of rent that was being claimed or, indeed any evidence at all about rents. Does this really look like a “pubco” acting in good faith in relation to the Code of Practise and rent review procedure that they claim to apply? 8 October 2008

Further supplementary evidence submitted by Karl Harrison

Key Figures Arising from Accounts for Enterprise Inns plc and Punch Taverns plc

Introduction

Punch Taverns has recently released headline information from its financial statements for the year to August 2008. The full statements have not been released at the time of writing. Enterprise Inns has now released headline information for 2008 but full statements are outstanding. For the above reasons, unless otherwise stated, my observations here relate to the year ending August 2008 for Punch and September 2008 for Enterprise.

Summary Headlines Total tenanted estate 15,335 pubs Total sales £1.75 Billion Beer and Cider Cost £616 Million Sales £1.179 Billion Profit £563 Million—85% Overall Profit as EBITDA £1 Billion Total Debt £8.8 Billion Market Capitalisation £575 Million Total Cost of Debt per Year £731 Million Total Cost of Debt per Pub £50,000/pub/year Chief Executives Remuneration £2 Million/year ! Share Option Bonuses Tenant Support £1,300/year/pub Advisors Unusually for competing companies both Punch and Enterprise use the same accountants and same partner at that firm, Ernst and Young Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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1. Estate Holdings Pubs leased/tenanted managed total Enterprise 7,763 0 7,763 Punch 7,572 870 8,442 The managed estate of Punch is largely Spirit Group. It is significant that the managed estate has decreased by 1,191 pubs since the same time last year and disposals and conversions to tenancies continue as we speak. Enterprise does not operate pubs and Punch does not want to operate pubs.

2. Sales Pubs leased/tenanted managed total Enterprise £880m nil £880m Punch £858m £703m £1,561m Total revenues of £1,779 million are generated from just over 15,000 tied pubs amounting to over £116,000 per pub. On a 50/50 divisible balance method at review, taking into account “wet rent”, each pub would need to generate profit before rent of nearly £250,000.

3. Beer/cider Sales to Tenants Sales Cost of Sale Profit % Profit on Cost Enterprise £602m £326m £276m 85% Punch (August 2007) £577m £290m £287m 99% Assuming that the volume discount realised by bulk purchasing is, say, 30% more than that achieved by smaller owner-operated pub businesses these two “pubcos” alone extract about £375 million per annum from the pub sector by overcharging for beer and cider. That is around £25,000/pub of so called “wet rent” across their entire tenanted estate on beer and cider alone, not including full tie revenues (wines, spirits and soft drinks) and revenue from machines.

4. Profits on Tenanted Estates EBITDA Operating Profit Profit Before Tax Tax Enterprise £512m £504m £263m £68m Punch £490m £469m £217m £40m Profits of over £1,000 million are generated by these two companies from just over 15,000 pubs. Around £65,000 per pub.

5. Financing Bank Loans Corporate Bonds Securitised Bonds Cash Total Enterprise £1,031m £1,185m £1,586m (£98m) £3,806m Punch (2007) £43m £253m £4,754m (£6.5m) £5,050m The above is a simplified version of the complex debt models employed by each company. Interest rates are marked to fixed margins above base rate or LIBOR. Bank loans may be subject now to decreasing interest rates as base rate falls although LIBOR is not falling at the same rate. Many of the securitised bonds are on fixed rates at 6% and above. In the case of Punch the weighted average cost of debt in 2008 was over 6%. Enterprise notes that 89% of its debt is fixed for 10 years at 6.5% so they will not benefit from current low rates. Note the small amounts of cash held by the two companies.

6. Net Financing Costs for the year Enterprise (2007) £392m Punch (2007) £339m These figures include redemptions, bank interest, bond interest, new loans and some share buybacks in the case of Enterprise. Interestingly, in 2007 Enterprise made great play of share buybacks totalling over £600 million but took out new loans of over £600 million seemingly to finance this. A useful way for directors to exit some of their positions in the company’s shares. The total financing cost for 2007 alone between just these two “pubcos” is £731 million! This equates to £50,000 per tenanted pub per year. John Moulton of Alchemy Partners last week estimated that the entire debt burden of UK pubcos was in the order of £20 billion. At a similar 6% cost this equates to £1.2 billion per annum in financing costs alone. Equivalent to £23,000/year for every single pub in the UK whether it is owned by a “pubco” or not. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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7. Chief Executive’s Shareholdings Ted Tuppen—Enterprise (2007) 2,600,000 around 0.52% Giles Thorley—Punch (2007) 232,000 negligible This does not take into share option schemes which I can subject to further analysis if we want.

8. Chief Executive’s Remuneration Salary Benefits Bonus Pension Total T Tuppen—Ent Inns(07) £575,000 £23,000 £345,000 £144,000 £1,087m G Thorley—Punch(07) £450,000 £335,700 £54,000 £839,000 Mr Thorley’s salary increased to £525,000 in 2008—a year when the company underperformed. The above does not include further lucrative share option schemes for all directors. Total remuneration packages for the two companies for key directors amounted to around £4.7 million not including all pensions and share options packages.

9. Investment and Tenant Support Capital Investment Rent Subsidy Additional Discount Enterprise £68m £2.7m £6.4m Punch £69m £6.3m £6m The investment in the properties amounts to just £8,500 per property and this is an exceptional year. The normal average expenditure per company per annum is £45 million and this would equate to £5,600 per property. This reflects the high burden of repairs placed upon the tenants. It is also important to point out that the investment for Punch includes their managed estate where they are responsible for all repairs. Accordingly one would expect the figure attributable to the tenanted estate to be significantly lower than £69 million. The level of rental subsidy for the year amounted to just £562.50 per pub for the year. The amount of additional discount was just £775 per pub for the year.

10. Key Advisors Both companies are audited and advised by Ernst and Young in Colmore Row, Birmingham which does seem very strange for companies allegedly in competition.

11. Common Shareholders Goldman Sachs, Axa, Barclays and Lansdowne Partners are amongst a raft of common shareholders although this isn’t particularly unusual. October 2008

Memorandum submitted by Rose and Crown Firstly, on the matter of rent review regardless of what has been said it is the clarity in which we receive it that leaves us in an extremely confused state. Secondly, a point we get regularly checked up on by Brulines is regarding cleaning. There is nothing to distinguish between water and beer when cleaning lines, only an assumption can be made because of the time you clean, nothing else. Furthermore, we decided to refurbish but were not allowed to carry out work ourselves. The reasons given hinged on legal aspects and costs which were far greater than our estimates and in due course added on to our rent 10%. With our beer tie we are in a no win situation as it’s a full tie. The “Big Six Brewers” owned between then 55% of pubs and brewed 75% of beer consumed in the UK. Monopolies Commission tried to protect the consumer. Venture capitalists spotted the loophole. Today the “Big FOUR brewers” produce 76% of the beer, the biggest size pub operators (there are plenty more), own 44%, the majority of these being Private Equity outfits. 503 pubs have closed in London alone over the last three years! (CAMRA, one year old statistics). Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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One PubCo Chief has cited figures that only 14% of PubCo pubs have closed . . . Is that figure reflective of the pubs they sold to the developer, tenants that have gone bust and had to hand back the keys or worse still, hand over to someone else even more naı¨ve? Of course not. The PubCo will keep it open until they can find another victim. Why are the PubCos not worried about this?...because they are sitting on massive property portfolios with hugely appreciated and inflated values. The two biggest, Enterprise and Punch have a combined business value of over £1 billion, (yet boast they invest £10k in each). One cannot help but feel the “over renting” is deliberate, which any Analyst who you show the current PubCo business model to, will tell you. PubCo business models no longer stack up. It’s not only the Tenants/ Lessees and Trade bodies/Press that can highlight this “Peter Rackman” like behaviour, Enterprise on close inspection can show it themselves, with their near complete failure to comply with any of their promises to the Parliamentary Trade and Industry Select Committee. It was mainly lip service and smokescreen. Is it really just a coincidence that pub numbers have remained largely unscathed for hundreds of years until the inception of Private Equity-owned Pub Companies? This week we received our invoice for October’s rent only to find it has again jumped up by 4.78% RPI from an already excessive £48,427,00 to the new rate of £50,741,81 not to mention rent review and exceeding beer charges. Or in the words of Ted Tuppen, “transparent and fair”. Until now they have been proud to claim that they rarely go to arbitration and have never lost, implying that tenants are satisfied. The reality is that if we had lost we would have had to pay costs in the region of £40,000 to £50,000. How many small businesses let alone one man lessees can aVord to take that risk? 29 September 2008

Memorandum submitted by Interpub plc We submitted a report in 2004 and would wish to make the following observations to the questions that the new inquiry has raised.

Has the Licensing Act 2003 had an eVect on competition within the market? The power now lies in the hands of the Local Authorities who also control planning, environmental and policing matters. Thus there is a perception if not reality that the Local Authority acts as policeman, judge and executioner in the first instance. It is only at appeal to the Courts that any injustice can be corrected. Some councils are overzealous in their desire to “control” licensed activities and trading hours to make their life easier with the residents who vote them in. Business operators who don’t reside in the Area have no say even though they pay huge levels of rates. It is possible for a single resident to cause significant “nuisance and noise” as part of the review process and the operator is often painted as being “guilty” until proven otherwise rather than the reverse. For example the issue of outside drinking which has been part of the culture and ambiance of certain areas is now being challenged by a few residents and councils who take little or no account of the fact that the pub has been there for centuries and that civilised street drinking in the summer is part of the ambiance. Nobody wants a noisy new outlet to open in a quiet residential street but outside drinking in an area where it has always taken place should not be challenged in the same way. The Licensing Act was not designed to change previously established and accepted norms. The fact that there is no “independent” person at the initial hearing to take an impartial view is a weakness in the system and leaves the impression that the Local Authority is all powerful. This in itself can eVect local competition especially where diVerent authorities take a diVerent view for example on terminal hours. If a pub enjoyed a late closing hour say until midnight or 1am prior to the Licensing Act 2003 due to its operators business ability and the neighbouring pubs did not it had an advantage. Many other pubs have been granted later licences now but some councils, notably Westminster, have policies not to grant new licences with hours later than midnight or 1am. Thus the pub whose trade (and therefore rental assessment) benefited from the later trading hour prior to the Act is now commercially disadvantaged.

To what extent has revisions to the framework codes of practice met the committees concerns? It would appear that most pubco’s have adopted codes of practice that deal with rent reviews, disputes and diYcult trading circumstances. Whilst the codes do provide a framework for discussions they give no absolute guarantees and the operator has to rely on the relationship they have with the pubco’s representative rather than a legal framework that gives more certainty. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Short of insisting that the codes become part of the legal agreement between the parties it is diYcult to see how they can become more eVective, especially when the economic climate is tough for both parties and each side needs to fight its corner.

To what extent are the codes applied by the pubco’s? As stated the codes do provide a framework for discussion and it appears that the pubco’s are more actively discussing issues with their tenants and lessees. Whether this is a genuine desire to help out in diYcult circumstances or a response to the fall in Share Prices and the fact that the Committee is asking these questions is debateable. Even if we assume that there is a genuine desire to help out, and there may well be, there are still key areas of dispute that remain: 1. The assessment of Fair Maintainable Trade and how this is aVected by market conditions between reviews. 2. The ability to actually obtain a rental reduction either between or at review. 3. The absolute price of beer for Tied tenants and lessees compared to those who operate free of tie or to managed houses operated by the pubcos. 4. The share of machine income which is often described as 50/50 but in reality is 75/25 as the rent calculation takes a further 50% of the tenants share!!

Is there a need for further regulation in the industry? In our previous submission we stated that we did not wish: “to throw the baby out with the bath water but rather that the industry should be encouraged to get together and hammer out a code of practice that guides the way the landlord and tenant relationship should be developed over the coming years in such a way that there is a genuine perception of fairness in the balance of power”. We went on to say that: “we live in an uncertain world climate and that a tenant or lessee only has to have a swing of 10% of turnover to go from utopia to bankruptcy”. Sadly the truth of that statement is all too starkly apparent in the current economic climate especially as not only are overall sales down but the cost base is significantly increased. (Please make reference to the ALMR Benchmarking Survey) The eVect of the Tie does little to help the situation as the operator is unable to obtain products at best market prices. Some pubco leases now tie much more than the beer which makes the situation even worse. Please see attachment 1 for an example of tied versus free of tie operating margins. The cost of operating long leases where the lessee has full responsibility for the upkeep and repair of the property is now too great unless they have complete freedom to negotiate the price they purchase products for. We do not believe that the model is sustainable in its current form as all of the increased operating costs are borne by the lessee not the landlord. The income streams enjoyed by the pubcos before the economic downturn meant that they were able to borrow with relative ease which in turn led to a hike in the price of licensed portfolios. They now have more of a struggle to pay for these borrowings and it is the operator who is squeezed the most followed by the suppliers of products. The pubco is in eVect the new “brewery”. There is significant pain in the UK pub industry at present and the model does little to help that situation. Whilst any upheaval, due to further legislation on the tie, would be regrettable and painful for the industry we do not believe that tied long leases are a sustainable model. We also believe that a majority of operators on long leases would rather have a commercial agreement with a landlord with a slightly higher fixed cost in terms of rent but with the commercial flexibility to negotiate the price for products. Many “tied” rents are now at a level where the “competitive disadvantage” of being tied is in no way addressed by the limited discounting of some products and the so called added services such as marketing support. It is therefore our position that the tied long lease, just like the tied cottage of feudal times, has no positive benefit to the industry; in fact the reverse is the case.

Attachment 1

INTERPUB PLC

2008–09 Free of Tie Margins versus Tied Margins

Annual Sales Margin % Annual Margin £ Free Pub Co Lease 387,866 69% 268,461 Free Commercial Lease 950,634 70% 664,148 Free Commercial Lease 494,549 67% 331,481 Freehold 592,007 68% 401,058 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Annual Sales Margin % Annual Margin £ Freehold 615,213 67% 410,975 Free Commercial Lease 605,885 68% 414,081 3,646,153 68% 2,490,203

Tied PubCo Lease 388,867 59% 228,167 Tied PubCo Lease 343,819 56% 192,047 Tied PubCo Lease 628,689 60% 376,586 Tied PubCo Lease 813,937 56% 457,318 2,175,313 58% 1,254,118

Margin loss % Margin loss £ Average Tied House 543,828 10% 54,383

29 September 2008

Memorandum submitted by the Association of Licensed Multiple Retailers 1. The Association of Licensed Multiple Retailers (ALMR) welcomes the opportunity to submit written evidence as part of the above inquiry. As the only national trade body dedicated solely to representing the needs and concerns of licensed retailers, and a contributor to the 2004 Trade and Industry Select Committee inquiry, the Association is well placed to review the conclusions reached at that time and to assess changes in the market place since that date. 2. By way of background, the ALMR was formed in 1992 specifically to represent the interests of those companies which own or operate multiple estates. At the time of the 2004 inquiry,ALMR included the major pub companies within its retail membership. Since that date, the Association has reviewed its membership structure and no longer represents landlord interests—uniquely amongst other industry trade bodies. Our views and comments are therefore drawn solely from the perspective of the multiple licensees who operate from the outlets. 3. Whilst we have a number of national companies within membership, over two-thirds are derived from small independent companies operating 50 pubs or fewer under their own branding. As well as pubs and bars, our members also operate restaurants, clubs and cafe´ bars. These are predominantly suburban community or neighbourhood outlets, many of which will be operated on a lease issued by a pub company or other commercial landlord. Currently 98 companies are in membership, between them operating 15,200 pubs and bars. Between them, ALMR members operate around half the UK managed estate. These companies are neither brewer nor individual tenant but rather Multiple Lessees—directly managing their own operations but leasing the outlets from a range of property owners. 4. The 2004 Trade & Industry Select Committee inquiry was exhaustive. It examined all aspect of public house ownership and took evidence from a wide range of individuals and bodies. We believe the conclusions of the inquiry were robust and reliable. It is therefore right that this inquiry is restricted in scope to a consideration of whether those conclusions still stand and how the recommendations have been applied.

Market Overview

5. In our submission to the Trade & Industry Select Committee in 2004, we defined Pubcos as companies with no brewing dimension who own their own properties but issue leases to individuals or multiple companies to operate them. Whilst the 2004 inquiry was more wide-ranging, it is clear that the focus of the current inquiry is on the activities of the largest of these pubcos; it should be noted that there is a large number of smaller pub-owning companies who operate the same model. Retail Pub Chains are exclusively managed operations whose property is either freehold or free of tie lease. Managed pubs are operated by employees or agents of the pub owner. Tenanted or leased pubs are operated by individuals or companies (Multiple Lessees) not related to the pub owner. 6. Over the past decade and a half, the total number of outlets in the UK has contracted by around 5%, but the nature of pub ownership has changed dramatically. The introduction of the Beer Orders in 1989 was a catalyst for unprecedented and unexpected change not only in the brewing industry but also the licensed retail sector. At the time the Beer Orders were introduced, the national brewers owned over half of all UK pubs and the share of the independent sector was negligible. This situation has been dramatically reversed, with the national brewers exiting pub retailing and the market share of pub companies and the independent multiple retailers operating their outlets has increased significantly. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Table 1

OWNERSHIP OF UK PUBS

Type of operator 1989 January 2004 % change August 2008 (est) % change 1989–2004 2004–08 Independents Single outlets 16,000 16,850 17,700 PubCo Tenanted/managed Neg 34,125 30,800 Sub-Total 16,000 50,975 !218.5% 48,500 "5% Brewer National 32,000 0 0 Regional 12,000 8,589 9,000 Tenanted/managed Sub-Total 44,000 8,589 "80.5% 9,000 !5% Total 60,000 59,564 "0.7% 57,500 "3.5% Source: ALMR members and Quantum Business Media. 7. As can be seen from the above, the pub market has stabilised since the 2004 inquiry. The seismic changes of ownership and ownership model witnessed in the 1990s and early 2000 have settled down, although the trend by pub companies and retail pub chains away from owning and operating a managed estate and towards a leased model continues. There has been a significant contraction in total outlet numbers as the eVects of consolidation in the industry during the past decade continue to be felt. 8. Consolidation in the UK brewing and pub retailing sectors has resulted in a concentration of outlets in the hands of a small number of players. This is, however, a concentration of ownership rather than operation. The growth in the Pubco estates in particular has enabled a large number of small, entrepreneurial multiple lessees to develop by providing new access to a wider range of premises. The Morning Advertiser recently established a top 100 club for these companies, estimating that there are 100 multiple independent retailers operating an estate of between three and 80 pubs. These companies have a combined turnover of about £800 million and are “the most innovative in the sector, with expansion tending to be dependent on organic growth by dint of trading success . . . they are the highly prized lessees of the larger tenanted pubcos”. They are also ALMR core members.

Has the Licensing Act 2003 had an eVect on competition within the market? 9. The Committee’s terms of reference specifically ask about changes arising from the Licensing Act 2003 which may impact on an economic definition of the market. The Act had yet to take full eVect at the time of the 2004 inquiry, and it was therefore unclear whether it alter any economic definition of the market and assessment of competition concerns within it.

UK MANAGED PUB/BAR ESTATE

2004 October 2006 October 2008 Community local 4,311 3,225 2,750 Food led outlet 3,180 3,039 3,045 Town centre bar 3,428 3,478 3,260 Accommodation led pub 641 374 488 Nightclub 421 470 485 Seated cafe´/wine bar 1,053 1,198 1,211 Total Managed Estate 13,034 11,784 11,239 Source: CGA/ALMR Benchmarking Survey. 10. As can be seen from the above table, the Licensing Act has not itself introduced further significant changes to the nature and size of the managed pub market—the only segment of the market on which it is possible to get reliable and robust information of this nature. Change has been gradual and organic, with outlets broadening the scope of their oVering rather than changing its overall nature. There has undoubtedly been a move away from the traditional public house model with the pub as an outlet for driving beer sales and now towards a more diverse commercial oVering; whether this is due to the Licensing Act, the Smoking Ban or social trends is a moot point. The trend is undoubtedly market led, arising from demographic change as much as change in ownership, and hence purpose, of the pub estate. It may have been accelerated in recent years as a result of regulatory change. 11. Whilst the emergence of a robust casual dining out market is perhaps one of the most significant trends in the on-trade over recent years, viewed purely from an economic perspective, this has not significantly altered the definition of the public house market from a competition perspective. The ALMR Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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has recently introduced a new research project designed to benchmark key financial data within the industry. This looks both at the costs of operating an average pub and how sales are made up. The latter information in particular highlights the fact that however diverse the market is, in economic terms, the make up of the business is remarkably similar—regardless of trading style (see table at Annex 1 on turnover mix by trading style). 12. In summary, and to answer the Committee’s specific question, we do not believe that the Licensing Act 2003 has had a significant eVect on competition such as to justify a revised market definition.

The PubCo Leased Model 13. There are two distinct models of leasing arrangements: the traditional short-term tenancy agreement developed historically by the brewers and still favoured by many of the regional brewers; and, the long, assignable lease developed initially by Inntreprenneur and adapted by the pubcos. Over recent years, the latter has gained precedence over the former. The diVerence between the two is essentially the length of the term and the degree of involvement of the property owner in the repair obligations of the outlet. Longer leases also have the benefit of accruing value to the tenant enabling to be assigned or used as a means of raising finance for further investment or expansion. 14. The pub leasing model is by no means perfect; as in other commercial business relationships, there are inherent tensions. On the one hand, tenants resist direct costs and constraints and, on the other, the landlord needs adequate compensation to reflect the nature and level of risk taken on as a property owner. What is beyond doubt is that the business model for leases has to work for both parties—without stable and successful lessees the pubcos unarguably have no business. 15. On the whole, the model works reasonably well: but it is a model predicated and established in an expanding market at a time of economic prosperity. In a weakening market, characterised by rising costs and declining consumer sales, it fares less well. The model is unduly rigid and does not react quickly enough to market and retail pressures. In the current market, with high beer prices due to duty increases and soaring costs, the only point of flexibility is the lessee’s profit margin. 16. It is also worth noting in this context that the inherent tensions in the relationship particularly surface at times of particular friction such as rent reviews, lease renewal negotiations or end of lease issues such as dilapidations. 17. The 2004 inquiry highlighted some of the issues of greatest controversy and debate between landlord and tenant, and there is little doubt that the pubcos have done much to attempt to address these. Tensions do, however, remain and these are exacerbated in times of financial and economic stress.

Codes of Practice 18. The most tangible outcome of the 2004 Trade & Industry Select Committee has been the revising of the industry Codes of Practice Framework on the Granting and Operation of Tied Tenancies and Leases. This in turn forms the basis of individual companies’ codes. Our understanding is that all major pub companies issuing leases and tenancies have now adopted their own code of practice. 19. A number of companies have also applied to the BII for accreditation of their code. This process is testimony to the activity undertaken by the industry in response to the 2004 inquiry and has served to publicise the existence of the codes themselves and the requirements on the companies issuing the lease/ tenancy. BII accreditation should not be seen, however, as a kitemark or as an endorsement of the quality and fairness of a code’s provisions, it is simply an assessment of the transparency of the code and whether the terms and conditions are clear to would-be tenants.

To what extent have revisions to the codes of practice met the Committee’s concerns? 20. The existence and accreditation of the codes is clear evidence of the eVorts taken by industry landlords to address the Trade and Industry Select Committee’s concerns. The principal objective behind the Committee’s recommendations for the framework code to be revised was to ensure that tenants knew what they were letting themselves in for at the start of the process, with a view to minimising potential areas of dispute. By and large, the codes have addressed that objective. They are relatively open and transparent and address many of the concerns of critics of the system. 21. Since the 2004 inquiry we have also witnessed a greater willingness on the part of the pubcos to engage with their lessees to address generic issues of concern. The ALMR has set up a series of “contact group” meetings with the major pub landlords and multiple lessees to discuss issues such as buildings insurance costs, beer pricing and discounts policy—all of which were raised during the 2004 inquiry. At times the parties have agreed to disagree, but at least there is a willingness to listen. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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22. That said, the existence of the codes has not addressed all the concerns of lessees and there remain issues on which leases are far from clear and transparent. These principally relate to the assumptions made in the establishment of fair maintainable trade and hence rent, beer discounts and the implications of the amusement machine tie. We have set these out in detail in separate sections below.

Calculation of Rent—Fair and Maintainable Trade 23. The basis on which annual rents are set is the subject of a complex formula taking into account market and trading conditions, the degree of flexibility in the other terms of the lease, the nature and extent of the tie and the degree of risk being undertaken by both parties. Principally, however, rents are related directly to the anticipated trading levels expected from a particular outlet and the net margins the lessee is likely to be able to achieve. This is an imprecise science, but pubcos are now increasingly willing to enter into detailed negotiations, to consider additional factors and to review rents accordingly. But the price for this flexibility is a higher initial annual rent or further lease restrictions. 24. The assumption is that lessee and landlord each take a 50% share of divisible profits. This is derived from the landlord’s assessment of “fair maintainable trade” achievable by a “good average tenant”. The landlord calculates what their 50% share will be and takes it in the form of rent stipulated over the next five years and regardless of the actual trading position of the pub. In a strong market, this is less of a problem because reasonable business growth and price inflation will compensate to an extent for over-rental. In an economic downturn the rent stays the same and the lessee’s share of a reducing profit diminishes to sometimes an unsustainable extent. The lease model does not generally have the flexibility to recalculate a new divisible profit in a declining market. 25. Recent analysis by licensed trade surveyors, Fleurets, suggests that the 50% divisible profits model in current market conditions actually translates into a landlord share of closer to 55–60% of divisible profits over a five year period. This is because, over a five year period, rent is index-linked but costs have increased by more than the rate of inflation. The reality of the FMT calculation is still not transparent to all potential lessees. 26. Of far greater significance and concern, however, are the assumptions used by the pub company to reach the net profit figure. In rent calculations, it is common for the landlord to make an allowance for common controllable site operating costs—such as staV, cleaning, utilities, glassware etc. This is invariably set at around 30–35% of anticipated turnover and has remained unchanged for many years. This figure is presented as a headline figure in the rent calculations, it is seldom broken down into its component parts and no justification is provided as to how it has been arrived at. In short, it is little more than an assumption of how much the landlord thinks it will cost the average lessee to run the average pub. The calculation is neither transparent nor evidence based. 27. Over the past year, the ALMR has been working on a new research project to benchmark common controllable site operating costs within the sector. The results of this research reveal that the assessments of costs being used by landlords in rent calculations are unrealistic and the true costs of operating the business are not being fully taken into account. As a result, the property is likely to be over-rented, further squeezing the lessee’s income. 28. Our research data reveals that the average cost of running an average licensed retail premises is just over 52% of annual turnover. This excludes rent and cost of sales. This varies depending on style of operation from 44.5% to 61.5% of turnover. Full details of this, together with the impact this has on lessee’s margin is included in Annex 1.

Beer Discounts 29. Beer is sold into the market at a wholesale price, and pubcos are able to negotiate significant discounts from this wholesale price by virtue of the volume of product they are purchasing. During the early part of this decade when the beer tie was scrutinised by the UK and EU Competition Authorities, and indeed the Trade and Industry Select Committee, there was a view that the distribution of beer discounts was reasonably equitable. At that time, roughly speaking, the average discount on a brewer’s barrel of beer (36 gallons) was about £120. This was divided as to £50 for the pubco, £50 for the tenant and about £20 for distribution costs. 30. Since 2004, whilst the wholesale price of beer has increased by around 50%—largely due to the increased cost of raw materials—pubcos have continued to be able to negotiate ever larger discounts. This is because, in a declining market, the competitive position of beer producers has been substantially weakened. Discounts have been oVered in order to push volume sales. Despite this, and contrary to the position in 2004, the pubcos have not passed those discounts onto their lessees. The pubco may now receive a discount of £230 per barrel, but the lessee still only receives the original £50 share. This has forced retail prices up in a diYcult market and contributed to the widening gap between the pub and the supermarket where maximum discounts are passed on to customers. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Machine Tie 31. The situation with regard to the amusement machine tie remains as inequitable as it did at the time of the 2004 inquiry, when the committee concluded that it remained unconvinced of the benefits of the tie. There is an absence of transparency regarding share of machine income and the true cost to the lessee. This is an issue of significant concern to tenants and lessees because machine income makes a direct contribution to bottom line. 32. Most lease agreements provide for the pub company and the lessee to share net machine income equally. In reality, however, the lessee’s 50% share of net machine income is often included within the pub’s net profit and so the lessee is “charged” twice and eVectively only receives 25% of the machine profit. 33. In addition, many pub companies oblige machine suppliers to pay a royalty to be included in their approved list. At the time of the 2004 inquiry, the pub companies claimed that this royalty payment was used to subsidise rents and ensured that lessees had access to the most up to date games which generated the highest incomes. Evidence from within our membership suggests that this is not the case. One of our members reported that he was being charged £70 per week rent for a machine in an outlet on an Enterprise lease. The rent for exactly the same machine, provided by the same supplier at the same time in another outlet in his estate operating on a Fuller tenancy was just £53.50. 34. The lack of transparency as to how machine rents are determined, royalty payments and the eVect of including machine income in a premises rental calculation is contrary to the spirit, if not the letter of the codes of practice.

To what extent are the codes applied by the pubcos? 35. We are not aware of any problems with regard to the application of the codes by the pub companies. This is an issue of trust—the pubcos need to ensure that their employees always follow their codes, not only to the letter but also in spirit, and it is incumbent on them to constantly police the situation. 36. There is one interesting issue which has arisen during our discussions with members. At the time of the 2004 inquiry, the major pubcos said that they were in the process of removing upward only rent reviews from their leases and others said that they would not enforce those provisions if contested. This latter point is emphasised in most codes of practice. Many old leases will still contain UORR clauses, however, and it is a moot point as to what happens when the terms of a code of practice conflict with what is said in the lease. In a contested rent review, it would be unclear whether an Arbitrator will have regard to the lease wording or the perceived intention of the codes of practice.

Is there a need for further regulation of the industry? 37. Despite these above concerns, we do not believe it would be appropriate to have additional legislative intervention in the industry. The pub industry is already heavily regulated and further statutory burdens would be unlikely to prove helpful. Just as with the Beer Orders, the Association believes that there would be unexpected and unsatisfactory outcomes that would destroy confidence and disrupt an industry that is still in a state of flux. Moreover, in an industry which continues to function through small business units, it is the imposition of new legislative and regulatory burdens which impact on the competitive position of tenants, and indeed all companies within the sector, far more than perceived deficiencies in the competitive structure of the industry. 38. Continued public scrutiny of their actions has resulted in a step change in the relationship between lessees and landlords. As a result of the 2004 inquiry, we now have a voluntary system of best practice which means that all prospective tenants are aware of the rent review process and that a complaints and dispute process is established. There is still a way to go before we have a fully transparent system with the full disclosure of information, but we hope that further pressure from this committee will resolve that through a voluntary route. 39. We believe it would be helpful were this inquiry to concur with its predecessor’s conclusions and recommend that its “successor Committee in the next Parliament review the situation in the public house industry”. This will maintain pressure on the pub companies to resolve outstanding issues of concern. 40. The pub leasing model is by no means perfect and there will always be tensions inherent in this relationship as both sides seek to extract the maximum value and to obtain minimum risk to themselves from the arrangement. The key is achieving an acceptable balance to enable all sides to achieve commercial success. The diVerent priorities are not necessarily mutually exclusive and can, with goodwill, be aired and resolved within the industry. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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ALMR Benchmarking Survey

Managed Multiple Operators

PHASE II

Autumn 2007

Turnover mix by income stream

100% 90% 80% 70% 60% Avg Of % Other 50% Avg Of % Gaming Avg Of % Accom 40% Avg Of % Food Avg Of % WetSales 30% 20% 10% 0% Community Food 2007 Town 2007 Accom 2007Club 2007 Wine Bar Total 2007 H2 H2 H2 H2 H2 2007 H2 Survey Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Coverage v Managed Universe

35% Community 30% Food 25% Town 20% Accommodation 15% Club 10% Wine Bar 5% All Managed 0% Coverage

Operational costs as a % of total turnover All Outlet average

Payroll Costs Entertainment Operational Costs Utility Costs Premises Costs

30 27.4

25

20

15 10.7 % costs . 10 6.7 3.9 3.9 5

0 Payroll Entertainment Operational Utility Premises Costs Costs Costs Costs Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 88 Business and Enterprise Committee: Evidence

Controllable Costs by outlet segment

65 61.53 60.6 60 56.1

55 53.3 Community local Town centre 50 48.5 Food led 44.5 Accom

% costs 45 Wine bar Club 40

35

30 2007 H2

Controllable cost centre % of total turnover

70 Other

Premises costs 60 Operating costs 50 Utility Cost 40 Sky 30 Security 20 Music and live entertainment 10 Manager Salary

0 Staff Wages Community Town Food Led Accom Wine Bar Club Local Centre

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Supplementary evidence from the Association of Licensed Multiple Retailers — Paragraphs 1–10 are amplification of answers given in evidence to the Committee. — Paragraphs 11 and 12 are supplementary information which we believe will further inform the Committee’s understanding of the ALMR’s opinion on matters not included in our formal submission.

Upwards Only Rent Reviews (UORR)

(ref: qq 168 and 175 and ALMR replies) 1. ALMR does not formally get involved on members’ behalf with rent reviews, nor do we carry out formal surveys. We do nevertheless have anecdotal information that there are cases where a rent has been reviewed downwards notwithstanding a UORR clause being in place. The Committee will understand that this is information is commercially confidential and we recommend that the following are contacted for detailed answers. ***

***

Arbitration Statistics

(ref: q174) 4. All three witnesses in our session were asked this question. ALMR does not collect this information and therefore cannot assist the Committee other than to suggest that the pubcos (those attending or otherwise) would be parties to arbitration issues and would likely be able to help.

Effect of Lost Revenue to the PubCos were the Wet Rent and/or the Amusement Machine Tie to be Abolished

(ref: q 185 and ALMR reply) 5. I did not reply to the question about “wet rent”. This is far more complex than could be answered in verbal evidence, and even in writing the variables are peculiar to the individual premises and to the supply agreements in place. 6. I withdraw my assertion that the loss of amusement machine revenue would be “in the order of £5 to £10 per week per machine per pub.” Having looked again at my notes and sought confirmation I should have stated that the figure was more likely to be between £45 and £70 per machine per week. 7. This revised figure is based on reports from a multiple operator, an ALMR Member, as per the illustrative table below. This figure is robust but not necessarily universal and should not be extrapolated without due consideration to regional diVerences, the decline in amusement machine takings generally and the fact that diVerent operators have diVerent agreements with the various pubcos. 8. Comparison of amusement rental and profit streams. (Note: the rent paid to the pubco is greater than actually paid to the machine co, and this is profit to the pubco in addition to the agreed split of net take.)

Voyager Lease Enterprise Lease Free of Machine Tie ££ £ 7 Day Take 200 200 200 VAT on take w 15% (30) (30) (30) Net Take 170 170 170 Licence Duty (LD) (15) (15) (15) Net Take Post LD 155 155 155 Rent paid (pubco rate) 53 69 (av) 40 (2008–09 deal to machine co) Estimated Landlord Rent Take, after rent 102 86 115 Pubco agreed share w 33.3% 50% — Lessee share amount 68 43 115 Pubco share amount 34 43 0 Profit to pubco 13 28 0 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Voyager Lease Enterprise Lease Free of Machine Tie ££ £ Illustrative benefits Total to pubco 47 71 0 Total to lessee 68 43 115 Total to machine co (basic rent) 40 40 40 155 155 155

The Beer Tie

(ref: q186 et seq and ALMR replies) 9. Following the evidence session the trade press headlines reported an ALMR position with regard to the Beer Tie that it does not necessarily hold, and study of the transcript will confirm this. If it helps the Committee we would confirm that ALMR does not challenge the legality of The Tie nor indeed is against the Tie itself especially in so far as it relates to brewers who own their own pubs or indeed to the smaller companies with their tenancy agreements. 10. ALMR, on behalf of its Members who are multiple operators, would however challenge the pubcos’ usual requirement for compulsory supply agreements on long, fully repairing and insuring leases. A full repairing lease implies the lessee having an asset that can be sold on, but the inclusion of the purchasing requirement can make the business less attractive to a prospective purchaser at assignment. Lessees would, for this and other operational reasons, welcome the opportunity to choose to negotiate lease terms that properly reflect the open market and then to be able to enter into separate supply arrangements.

Operating Costs 11. There was an indication that the Committee wanted to address the issue of costs but the opportunity never arose. In this supplementary submission the ALMR would report that the Association collect “benchmarking” data on an annual basis and can oVer this to the Committee—historically or in January 2009 when our third survey is completed. 12. In early 2008 we reported that the operating costs before cost of sales and rent, and averaged across all types of pub and bar businesses was about 52% of sales. In community pubs, which could reasonably be associated with the pubcos’ estates, this figure was about 45%. Costs and especially increased costs are attributable to any number of causes but we submit that the pubcos should properly allow for operating costs when arriving at the assessment of fair maintainable trade and the divisible profit. 2 January 2009

Supplementary evidence from the Association of Licensed Multiple Retailers (ALMR) As you will be aware, the Association of Licensed Multiple Retailers (ALMR) has previously submitted both oral and written evidence to the ongoing inquiry into the pub companies. Following discussions with the Clerk to the Committee, we have, as requested, collated additional market information which we believe may assist the Committees deliberations. Our previous evidence has focused on providing an objective overview of the problems faced by pub company (pubco) lessees; at that time we did not touch on possible solutions. Again, following discussions with the Clerk, we have set out below some suggested recommendations for the Committee’s consideration. We believe these to be sensible, pragmatic and would address the most pressing issues of concern to operators, without the need for further unwelcome regulatory intervention.

Market Information Since the introduction of the Beer Orders in 1989, the nature of pub ownership has changed out of all recognition. No one at that time could have predicted the emergence of the debt market nor its impact upon the pub sector, but the ability of pub owners to issue low coupon bonds against income derived from pubs resulted in an unexpected balance of power between pub property owners, brewers and pub retailers, with tied property owners achieving more market dominance than envisaged. At a national level, the model of a vertically integrated business—with one company producing, distributing and retailing product—has been broken. The former national brewers (Whitbread, Allied Domecq and Bass). The only remaining vertically integrated businesses are the super-regionals—Marston’s (approx 2,250 outlets) and Greene King (approx 2,553 outlets)—and regional brewers. Brewery ownership of pubs has declined from 44,100 in 1989 to just 9,811 in September 2008. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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In contrast, the growth in pub ownership by property companies with no production capacity has grown apace. The number of pub company owned pubs was negligible prior to the Beer Orders and now account for 27,461 outlets (43.5% of pubs). Around half of these are owned by the two national pub companies, Enterprise and Punch. The Pub Industry Handbook 2009 quotes the following numbers of pubs by owner

Enterprise Inns 7,775 pubs Punch Taverns 7,604 pubs Admiral Taverns 2,300 pubs S&N Pub Enterprise 2,200 pubs Other pubcos less than 2,500 combined (County Estate, Wellington Trust Inns, London Town)

Pub Closures You are keen to understand whether the pub company estate has been particularly adversely aVected by the recent trend in pub closures. There has been much speculation about whether the increased numbers of closures have come from the pubco or independent free trade. The ALMR has recently commissioned research from CGA Data on pub opening and closures since 2003. The results are broken down by trading style (segmented analysis) and ownership (operational style). I have attached this for your information at Appendix 1. As the attached table shows, the bulk of the closures have come in the pubco and independent/free trade model. The pubco estate accounted for 37% of all net closures in 2008, and the independent free trade some 42%. Taken over the period as a whole, however, the cumulative loss in the pubco estate accounts some 46% of all net closures. In contrast, the decline in the independent free trade is 37%. The trend in net closures is also more marked in the pubco sector and has accelerated more significantly than in the independent sector. Between December 2007 and December 2008, the number of net closures in the pubco sector increased by 27% whilst the increase in the independent free trade was more modest at 14% It is worth noting in this context, however, that the reason there are a higher number of net closures per week in 2008 is because new pub openings dropped away dramatically over the course of the year. The number of new openings in the pubco sector was two thirds lower in 2008 than in 2007. This suggests that the pubco business model is not expanding. They are not attracting new entrepreneurs into the market and whereas previously pubco lease could easily be assigned to a new operator when the lessee got into trouble, or assigned to a temporary management company; increasingly the pub is now closing.

Beer Pricing You have asked for up to date information on wholesale beer prices and the level of discount available to the tied and free trade. This type of information is commercially sensitive as the level of discount will be dependent both on the size of the company and the volume of product purchased. Nevertheless, we have canvassed the views of the tied lessees and free trade operators in order to update the figures provided to you by Morgan Stanley; although these are dated 2008, they are considerably out of date.

Morgan Stanley estimates ALMR estimates List Price £350 per barrel (36 gallon) £450–480 per barrel (36 gallon) Tied lessee discount £20–30 £40–45 Individuals free of tie discount £75–100 £140-150 Multiple free of tie discount £170-180 Rising to £205 for larger companies Pubco discount £150–170 £210–250

The list price and level of discount will be dependent on the type of product purchased. Broadly speaking, a higher level of discount will be available for premium products owned by the brewer with whom supply agreement is contracted. The prices quoted above are current as at February 2009 and relate to premium lager. The list price and discount for cask ale is, on average, £100 lower. For example, the list price of Heineken purchased direct from Scottish Courage (Feb 09 price list) is £483 per barrel (36 gallon, 288 pints). An individual free trade tenant would be able to buy it for £333-343 per barrel and a multiple operator would pay £278-£303. The pubco would pay just £272-£233 per barrel, but would sell it on to their tied lessee for £438. It is also worth noting in this context that whilst the wholesale list price will change, usually on an annual basis, the level of discount invariably does not. The level of discount is expressed as an absolute figure, not a percentage of the list price. When the tied pubco model was emerging in the 1990s, the level of discount was significantly less than those quoted above. On average, the total discount available to a pubco was £50 per barrel, and this was invariably split 50:50 between the property owner and the tied lessee; indeed, some Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 92 Business and Enterprise Committee: Evidence

tied tenants will still only receive £20-30 discount. Whilst the size of the discount available to the pubco has broadly kept pace with increases in the wholesale list price, the portion of that discount passed on to the tied lessee has not. Even the best performing tied lessees and most flexible pubco leases only attract a discount of £45 per barrel.

Issues of Concern to Operators

In our previous written evidence we have set out in some detail the problems faced by multiple operators. In short, the long lease model operated by the national pub owning companies is insuYciently flexible to deal with the severer economic downturn currently being faced. When the model was developed in the early 1990s, it was based on an assumption that the landlord and lessee would share the economic benefit accruing from the business. Whilst that may have been so in the early days, it is far from being the case today. Rather than an equitable share of the profits of the business, the reality is that the landlord’s share is now closer to 70%, and in some cases may be as high as 80%. In seeking to suggest remedies or recommendations to the problems faced by operators, the ALMR’s overriding objective is to ensure that the division of the economic benefit from the property is fair and transparent. I should stress that the problems arising in the market at present relate to the long, fully-repairing tied leases (typically 10—30 years) operated by the national pubcos—that is those companies owning pubs but with no brewing capacity and with a leased estate which is genuinely nationwide (this could be defined by number of outlets). Broadly speaking, the same levels of problems are not experienced by tenants or lessees of smaller pub companies or regional brewers where the economic benefits, and risks, of the business are shared more equitably. The following recommendations should therefore only apply to the national pub companies and not to the trade more generally. We would strongly urge the Committee to be equally specific in its definitions of where the problems lie and the solutions to apply. Again, in confidence, we have attached examples of three actual rental calculations at Appendix 2. [not printed here] In each case, the rent has been assessed by the pub company and the same calculation has been made by an independent retail expert. These examples highlight the lack of transparency in the model and the problems which arise from the use of assumptions of trade and costs. The situation is further complicated by the economic eVects of a product tie—and it is the eVects of the tie, rather than the tie itself which concerns our members. The examples demonstrate the complexity of the pub leasing model, and highlight the fact that there is no one single remedy which can be deployed in isolation as a panacea. A raft of remedies will be required to address operators concerns. We would therefore urge the Committee to resist the temptation to recommend a simple regulatory solution. In the following recommendations we refer to a “Code of Practice”. This should be taken to refer to the industry code of practice on the issue and management of leases as well as the individual codes developed by the individual companies. We further believe that any company issuing a lease should be required to publish a code of practice for their lessees. — Rent Calculation: the basis of calculating rent in the pub trade is done by means of reference to a hypothetical tenant and an assessment of Fair Maintainable Trade. These assumptions are, in the first instance, based on calculations from the landlord. The examples provided at Appendix 2 clearly demonstrate how this model applies in practice. In a declining beer market and a contracting economy, the model over-estimates the turnover the unit can realistically sustain and significantly under-estimates the costs of doing business. It is this latter point which is particularly significant and which we believe should be assessed. The allowances made for the costs of running the business have remained broadly unchanged over the past decade. At the same time, the regulatory costs have increased exponentially. In particular, employment costs as a percentage of turnover have increased by 62% over the course of the last decade—from 17% of turnover in 1998 to 27.6% of turnover in 2008.4 As a percentage of turnover, operational costs now amount to 52% of turnover. This includes around 7% for a manager’s salary—which a multiple operator would bear as an additional cost but is not normally taken into account by pubcos in their rent calculations. For the purpose of pubco rent negotiations, the operating costs of an average pub would be 43-45% of turnover. The majority of these operational costs will be outside the lessee’s control and will be costs that he has no choice but to bear, however eYcient an operator he is. Despite this, landlords still routinely make allowances for costs of just 34% of turnover in rent calculations—both initial rent negotiations and subsequent rent reviews. Some surveyors used by landlords as independent experts in rent reviews will only make allowances of 29% of turnover for operating costs. We recommend that the Code of Practice be amended to require the landlord to assess costs by reference to nationally published independent, authoritative statistics about the level of operating costs incurred by that type and size of business, such as the annual ALMR Benchmarking Survey.

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In order to assist with the implementation of this second recommendation, we would be happy to make the results of our Survey available to all within the industry and would extend the coverage to include non-ALMR members, individual tenants and other interested parties — Rent Review Process: as has been demonstrated above, the system of rent review is heavily weighted in favour of the landlord. The timing of the rent review and the decision on whether to invoke the provisions of the lease allowing the rent to be reviewed are in the hands of the landlord. Equally, it is for the landlord to prepare an indicative profit and loss account justifying the new rent, and for the lessee to argue against it. We believe it is essential that the method of rent calculation is made more transparent so that all sides know and understand how the profits of the business are being divided. The existing Codes of Practice clearly stated that a lessee is obliged to provide full business disclosure to their landlord. Enterprise Inns Code of Practice obliges the lessee to “operate with complete transparency and be required to provide copies of VAT returns and annual accounts as requested”. Similarly, there is a requirement on the lessee to be “open and honest in all discussions about the rent” during a rent review. There is no corresponding obligation upon the landlord to be transparent. We recommend that the Code of Practice be amended to require the pubco landlord to operate with complete transparency regarding the level of income that they derive from the business, from all income streams. On the basis of this, they should work to ensure a fairer division of profits and economic benefit between the landlord and lessee. It would be for the landlord to decide how best to achieve this and this could be negotiated on a case by case basis using such remedies as a greater level of discount, additional support or removal of part or all of the tie on income streams. In addition to the regular system of rent reviews, lessees of some pubcos are able to request a rent review outside of this cycle if they are experiencing particularly diYculties. There is currently a waiting list for such reviews, but there is evidence that the pubcos are listening and responding to genuine cases. Our attention has just been drawn to two worrying developments, however. First, where downward rent reviews are agreed on non-RPI leases following negotiation, the pubco has asked for the terms the lease to be changed to provide for an annual increase in line with RPI, even though the Code of Practice is silent on that point. In some cases, this has nullified the benefit of a rent reduction. Second, one pub company has recently changed the rules such that any review under its Code of Practice can only have eVect for a period of one year. Previously they were recorded by deed of variation until the next formal review, whenever that fell. Whilst the pubco would point out that the tenant could keep calling for Code of Practice reviews, that process is time consuming, stressful and not in the spirit of remedying the ills of a business that it is fundamentally over-rented. We recommend that the Code of Practice is amended to outlaw the practice of RPI increases. Although this is not a major issue in the current low-inflation environment, it may be a concern in the future. In addition, the Code of Practice should be expanded to include more details on the how the rent review will work, the process and procedure to be followed, what the lessee can expect in terms of outcome and what will be expected of them. — Issue resolution: if a lessee disagrees with the outcome of the rent review process, the Code of Practice provides for them to refer the matter to arbitration or determination by an independent expert. The existing arbitration route is expensive and not easy for an individual lessee to navigate. It also relies upon the input of “independent experts”. In practice, the majority of these are surveyors or members of the RICS pub valuation group. As many work for the pub companies, their ‘independence’ is sometimes seen to be in doubt. Moreover, whilst they are experts at assessing the value of a property, they are not well equipped operationally to determine fair maintainable trade and likely profit. What lessees need is access to a quick and cheap means of resolving disputes and disagreements over trading levels, costs and other variables in the rent calculation model. We recommend that the industry works to develop a voluntary system of dispute resolution whereby disputes between the national pubcos and their lessees are referred to an Independent Rents Panel. An Independent Rents Panel should comprise of one industry expert, one operational expert and be chaired by an independent member. The experts could be drawn from a list nominated by pubcos and lessees; a large number of ALMR Council members have volunteered their time to sit on such a panel and act as an objective expert on the operational side of the business. — The Tie: as can be seen from the examples provided in Appendix 2, the economic eVects of the inclusion of a product tie within the lease agreement distort the fair division of profits between the landlord and lessee. It is the economic eVect of the tie, and its place in the agreement as a whole, rather than the fact that there is a product tie in place that causes the main concern to our members. We recommend that the Code of Practice be amended to require the landlord to be transparent on the level of profit they derive from the business from all income streams, including profit on sale of wet goods and machines. In an ideal situation, the landlord would be required to create a notional profit and loss account for the outlet, stripping out the economic eVect of the tie on the business. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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We understand that the Committee has received several proposals calling for the abolition of the tie by means of legislation. We are concerned that further regulatory intervention in the sector may have unforeseen consequences—as indeed the 1989 Beer Orders did. If the Committee is minded to make a recommendation on the tie, then we would suggest the following: We would however recommend that the Committee challenge the pubcos’ usual requirement for compulsory supply agreements (the Tie) on long, fully repairing and insuring leases. Lessees would welcome the opportunity to choose to negotiate lease terms that properly reflect the open market and then to be able to enter into separate supply arrangements. We would gladly assist with how the new arrangements be defined and the transition be managed. — Code of Practice: the development of an industry and individual company codes of practice on the issuing of leases was the most significant outcome of the 2004 Trade & Industry Select Committee Inquiry. We believe it would be helpful if the current inquiry were to build on that work to strengthen the Codes’ provisions—in addition to the above amendments highlighted above. We recommend that the existing Codes of Practice be amended: — to make clear that that they apply to existing as well as new leases — to provide for the removal of all Upward Only Rent Review clauses, from existing as well as new leases, at no cost to the lessee. Although all the main pubcos have clarified that they will not apply these in practice, the fact remains that the clauses remain in existing contracts and could be legally enforced if a new owner wished to. Most landlords are happy to revise the contract to remove these clauses on request; however they charge existing lessees £500 for this. It will be important for the amendments noted above in relation to RPI to be included at the same time to avoid an UORR clause being immediately replaced by an annual uprating. — to provide for lessees to take action against the pubco for non-compliance with the provisions of the code of practice

APPENDIX 1—CGA PUB OPENING AND CLOSING DATA Data provided covers all of the UK. Openings during the year refer to new outlets opening for the first time. A change of use or change of ownership would not be reflected in the closure figures. Segmented analysis refers to analysis by trading style and Operational analysis refers to analysis by ownership. Total Pub Analysis Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Sep-08 Total Pubs 66,690 66,279 66,177 65,861 64,452 63,052 Openings During Year 928 1,162 1,716 1,035 403 Closures During Year 1,339 1,264 2,032 2,444 1,803 Year on Year Change "411 "102 "316 "1,409 "1,400 Net Closures Per Week 8 2 6 27 36

Segmentational Analysis Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Sep-08 Community Local 42,186 40,456 39,791 37,400 36,258 35,091 Openings During Year 283 326 378 193 82 Closures During Year 1,024 780 1,072 1,215 1,124 Migrations in/out of segment "989 "211 "1,697 "120 "125 Year on Year Change "1,730 "665 "2,391 "1,142 "1,167 Net Closures Per Week 14 9 13 20 27 Food Led Outlet 9,533 9,930 10,068 11,284 11,268 11,251 Openings During Year 84 84 217 94 64 Closures During Year 58 112 312 181 143 Migrations in/out of segment 371 166 1,311 71 62 Year on Year Change 397 138 1,216 "16 "17 Net Closures Per Week "11222 Town Centre Bar 11,197 11,830 11,905 11,800 11,368 11,176 Openings During Year 275 315 433 229 82 Closures During Year 146 241 399 633 342 Migrations in/out of segment 504 1 "139 "28 68 Year on Year Change 633 75 "105 "432 "192 Net Closures Per Week "2 "1 "187 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Segmentational Analysis Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Sep-08 Seated Cafe´/Wine Bar 3,774 4,063 4,413 5,377 5,558 5,534 Openings During Year 286 437 688 519 175 Closures During Year 111 131 249 415 194 Migrations in/out of segment 114 44 525 77 "5 Year on Year Change 289 350 964 181 "24 Net Closures Per Week "3 "6 "8 "20

Operational Style Analysis Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Sep-08 Managed Group 6,055 7,083 6,327 5,540 4,962 4,397 Openings During Year 89 85 85 90 32 Closures During Year 60 71 82 107 76 Migrations in/out of segment 999 "770 "790 "561 "521 Year on Year Change 1,028 "756 "787 "578 "565 Net Closures Per Week "1 "0 "001 Regionals 9,144 9,832 9,900 9,643 9,935 9,811 Openings During Year 29 31 51 58 26 Closures During Year 76 85 114 137 192 Migrations in/out of segment 735 122 "194 371 42 Year on Year Change 688 68 "257 292 "124 Net Closures Per Week 11124 Pub Cos 30,027 27,632 27,626 27,985 27,569 27,461 Openings During Year 195 145 121 196 72 Closures During Year 323 301 587 774 622 Migrations in/out of segment "2,267 150 825 162 442 Year on Year Change "2,395 "6 359 "416 "108 Net Closures Per Week 2 3 9 11 14 Independents 21,464 21,732 22,324 22,693 21,986 21,383 Openings During Year 615 901 1,459 691 273 Closures During Year 880 807 1,249 1,426 913 Migrations in/out of segment 533 498 159 28 37 Year on Year Change 268 592 369 "707 "603 Net Closures Per Week 5 "2 "41416

Memorandum submitted anonymously

I submit the attached written evidence to the Business & Enterprise Select Committee reviewing the Fair Trade Investigation of Pubcos.

As an American I came to the trade with a diVerent set of standards of service and business operations. Breweries in the United States legally cannot own retail licensed premises; they are prohibited from taking the wholesale and retail profits from the sector. As we’re aware the Beer Orders intention was to open the trade and benefit the consumer, I do not believe this has been the case.

1. I am a Publican, currently with two Punch leases and I welcome this opportunity to make a submission to the Select Committee. My experience with Pubcos is confined to Punch so I cannot comment on the operations of other Companies.

2. One of my leases was originally with Vanguard and the other was agreed during the early days of Punch, so I have a less restrictive tie the currently on oVer.

3. As this is my trade I have worked to familiarize myself with the Punch business model and I have come to conclude that it is flawed and has in fact become outdated especially under the current economic climate strongly believe that the model has become destructive to both the trade and to the greater public. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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4. I can tell you that in the 11! years I have held these leases, my relationship with Punch has become increasingly strained and frustrating in the following ways.

5. The structure of the tie is without regulation and is not subject to market forces, in the normal accepted way. Cheaper products have come into the market, from abroad or from more eYcient manufactures; this can be seen in the oV trade as well as supermarkets. It is wrong to say that this is only due to bulk buying power, which supermarkets may benefit from; as corner shops have no such power yet still beat me on price.

6. Since Pubcos do have bulk buying power they certainly benefit from a lower price, if this were passed on to pubs this hearing may not have taken place. The profit Punch takes from its” pubs is unchecked; whereas my profit is limited by proper market forces. In simple terms, I have to compete with my neighbouring pubs; Punch can charge me whatever price they and their shareholders think they can get away with and is just not right and unfair.

7. Imagine if you were to rent a house for yourself and your family to live in. The house is suitable in everyway and was available for rent at say 40% of the market value. Good deal right! The only catch is that you have to buy all your utilities from the company that owns the house. Maybe it’s not so good a deal.

8. If the above business model were to come into eVect, I doubt very much if anyone would take up the oVer because it’s clear that without any limits on the pricing of the utilities the renter would be at the mercy of the owner. Perhaps the reason we don’t have this model working right now is because of utility regulators.

9. Almost nothing stops Punch or any other Pubco from increasing the prices which they charge for their tied beer—nothing. In a practical sense they are immune from market pressures, they have a tied estate.

10. This license to control the price of beer isn’t enough for Punch, if they are going to satisfy the shareholder they need to squeeze profit from every area, maximise the profit streams, including rents.

11. I have been through two five-year rent reviews and I am now involved in two lease renewals. I have come to believe that Punch has lacks any ethics in these negotiations. I have encountered a Business Relationship Manager (BRM) who amongst other things, showed up on Easter Sunday to perform a cellar- check check, demanded to see personal paperwork during a private family wedding, visited my pub with his girlfriend ordering several rounds of drinks without paying, and called upon me on the very first day a Section 25 “Landlords Notice” could be served.

12. One could put this behaviour oV to a personality conflict or even a single rouge employee, and I did. I made a formal “Executive Complaint” to directly to Giles Thorley the CEO of Punch. The complaint was acknowledged and while I was led to believe it was being investigated, the same BRM instigated an investigation of my other pub which was not under his jurisdiction, a few infractions were discovered and Punch filed an injunction against myself, the value of which was ultimately decided to be nil. To this day I have not been advised of any outcome to the Executive Complaint I made.

13. I have no doubt that Punch engages in deliberate “bully boy” tactics to squeeze its lessees as much as possible during rent reviews. Punch has in the past made much of spinning its self as a “partner” in my business, I find that in the current batch of advertising and charters that hit my desk I am now considered a “customer”. The “Dear Partner” letters have been replaced by “Dear Customer” letters, in truth “Dear Victim” would be more appropriate.

14. Punch is proud that it regularly “updates” its Customer Charter. What I see happening is the constant erosion of any rights I may have from my original lease. These are not limited to a missed delivery charge, a fee for selling my business, and a fee for even listing my business for sale; these may not be legally enforceable, but they certainly work to enrich company and develop the power the Pubco has over the publican.

15. Even when producers create products or change products to maximise the margin, these are “sold in” to publicans as positive changes to the business. I know of at least one example where a product was repackaged with a higher cost price, and the only thing Punch did was advise everyone to buy it (This example could have cost your average pub an extra £3,000 per year, with 7000 pubs, we’re not talking about a small amount of money).

16. I discussed with both my BRM and his Operations Manager the possibility of purchasing the freehold of my premise. Both said that this was impossible as they couldn’t then control the prices I charged and could under-cut the other Punch pubs in the area. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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17. I would point out that Punch is now oVering discounted products provided that the pub retails the product for a fixed price. This is part of the way they intend to deal with the declining economic climate, price control.

Recommendations: 1. Consider legislation oVering Lessees the right to buy there freehold, or at lease a right to buy yourself out of tie, at any time during your lease. 2. Consider legislation which regulates the non-discounted price Pubcos charge for there tied products. 3. If Pubcos are going to rent pubs to a “fair market rent” then we need to have transparency in that calculation. The non-tied rent needs to be known to the lessee. This should be disclosed and the size of the tie limited to this amount.

Example: The Dog & Duck has a Fair Market Rent of £30k per year. Fare Trade PLC owns the Dog & Duck, and would fine it easier to let the pub if the rent were less; say, £20k. A publican is found and a deal agreed. Fare Trade PLC will sell the publican beer at £300 per barrel. The Publican has sourced the same beer for £200 per barrel, the publican will buy beer from Fare Trade until the amount of the discounted rent is paid (£10K discount % 100 barrels). At which point the tie ends and the publican is free to buy beer from whom ever he chooses. The Pubco can choose to structure the deal anyway they want according to the matrix:

50% Discounted Rent % Larger Tie 25% Discounted Rent % Medium Tie 10% Discounted Rent % Smaller Tie Full Rent % No Tie

The important factor here is transparency in the property values and wholesale prices. 29 September 2008

Memorandum submitted by Winter Hill Consultancy We are pleased that a review of the Trade & Industry Committee inquiry into PubCos is underway and we are hopeful that your review may be able to focus on what we believe are two of the key issues examined by the inquiry.

1. Rent Reviews The PubCos stated to the TISC inquiry that their rents are based on 50% of net profits—calculated from an assessment of what is “Fair Maintainable Trade”. In order to verify what is reality, may we respectfully suggest that you might obtain a summary of actual data in respect of those Punch Taverns lessees whose accounts are prepared by Milestone Accountants, to whom (we believe) new lessees have been referred by Punch Taverns themselves for about the last two years. To keep it simple and economical, you might just ask Milestone for an (anonymous) listing, comprising the net profit before rent, the rent itself, and the net profit after rent. The net profit figures should be adjusted to exclude: — AWP income (if that is already shared); — interest and loan charges; — vehicle expenses; and — house manager costs if one is in situ. This is not a complete surveyor’s formula of course, but it should at least give a rough idea of what is happening in the real world.

2. The Balance of Power The TISC inquiry commented on the balance of power between PubCos and their Lessees. The nature of PubCo leases is that the Tenant is legally hamstrung and cannot easily escape his lease in the event of a rent dispute or if his business is failing. He must either “sell on” his lease obligations or (if the business is failing) he must crash heavily and may then lose everything he owns. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Therefore, we would propose that a Tenant should be allowed to simply give six months notice at any time in order to surrender his lease back to the PubCo—without any financial penalty arising (or additional premium on the amount of rent charged). We believe that this simple measure would help to redress slightly the balance of power in favour of the Tenant in situations of last resort, when his relationship with his PubCo may well have broken down. 29 September 2008

Memorandum submitted by Enterprise Inns plc

Executive Summary Enterprise Inns plc (“ETI”) broadly supported the recommendations of the Trade and Industry Select Committee (2004) report into the relationship between pub companies and their tenants, not least because ETI either had already met, or was on track to meet the standard to which the vast majority of recommendations aspired. However, ETI did not and does not accept the rationale behind the Committee’s recommendation to remove the tie for Amusement With Prize (AWP) machines and the reasons for this are explained in paragraphs 19 & 20 below. Current market conditions are challenging for all consumer-facing businesses and the ETI leased and tenanted model is well-placed to respond to these trading challenges and to provide valuable assistance to licensees in appropriate circumstances. ETI believes that current market mechanisms ensure that there is vibrant competition across the pub sector, that existing custom and practice, as demonstrated by ETI, is both fair and flexible and that existing regulation is more than adequate.

Background ETI was established in September 1991, was listed on the in 1995 and has grown its estate, through acquisition, to the current level of 7,782 pubs, located throughout England and Wales. 98% of the pubs in the ETI estate are owned freehold by the company and all ETI pubs are operated exclusively under tenancy or lease agreements. ETI remains steadfastly committed to the leased and tenanted business model which provides a low entry cost, low risk opportunity for an entrepreneurial, independent business person to develop a successful business supported by the organisational capabilities and financial stability of a large company. ETI has sought continually to improve the quality of its pub estate, through churn and investment. In the last 4 years, the company has invested over £250 million, alongside substantial investment by licensees, in additional facilities, refurbishments and new retail propositions to help them grow their businesses in an increasingly competitive marketplace. The value of the ETI pub estate now stands at £5.8 billion.

Current Trading Environment The leisure market has changed significantly over recent years, as a consequence of changing economic conditions, demographics, lifestyles and consumer habits. In addition, the number and range of choices for consumer discretionary expenditure has expanded massively. Furthermore, staying at home has become an increasingly attractive option, with huge improvements in at-home entertainment, the massive expansion of internet usage and the impact of supermarket pricing, particularly on alcohol consumption. Pubs and licensees have had to evolve and improve in order to compete eVectively and in some cases to survive in this testing marketplace. In the last 12–18 months, pubs have been further aVected by the worsening economic climate, compounded by the smoking ban and the burden of regulation and taxation. Exposed to rising input prices, the crisis of confidence amongst financial institutions and the current decline in consumer confidence, the pub industry is inevitably facing severe trading challenges. Pubs are closing, permanently, at an unprecedented rate, as the accumulation of external influences causes them to become unviable as businesses. The majority of such closures are occurring within the independent free trade pub and club sector (Source: CGA Strategy). However, current economic conditions are undoubtedly contributing to the increase in business failures of all types, including in leased and tenanted pubs. In ETI’s experience, there is a strong correlation between business failure and licensee quality, regardless of the economic circumstances. Where pubs in which licensees “failed” have been re-let, the sales performance of these pubs, under new management, has typically improved by 12–15% in the 12 months following re-opening, when compared with the 12 months prior to business failure. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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The Strengths of the Tie and the ETI Leased and Tenanted Business Model

The evidence presented by ETI to the 2004 inquiry sought to demonstrate that the ETI leased and tenanted business model, openly negotiated and fairly managed, closely aligns the profit objectives and the business risks of both parties. The supply tie ensures that ETI has a vested interest in sales of drinks products, which are inextricably linked to pub traYc. Increased pub turnover, as a consequence of increased footfall, leads directly to increased wholesale margin for both ETI and its licensee, whilst rent levels remain constant, at least until the next scheduled rent review. Conversely, declining sales of tied drinks products lead directly to a fall in income for ETI. In simple terms, a drop in beer sales introduces an immediate reduction in the “wet rent” paid by the licensee. If circumstances are such that further help is needed, the leased and tenanted model provides a real incentive for ETI to oVer additional assistance. Never has this been more obviously and demonstrably evident than in the current trading climate, where ETI is working harder than ever, for less profit, supporting licensees with substantial financial help. In the year to September 2008, some 1,600 ETI pubs received direct, non-contractual financial assistance from the company, comprising a combination of non-repayable rent concessions and tied drinks product discounts, on each occasion for an average of four months. Approximately 70% of businesses which receive such support regain financial stability and continue to trade. The balance are either assigned (sold) by the incumbent lessee, or surrendered by mutual agreement to the company,in order to be re-let to new operators. Current economic conditions are exposing the relative weakness and fragility of some small business operators, whilst at the same time reinforcing the positive attributes of the tied lease and tenancy model. In diYcult trading times, it is inevitable that some licensees will not be good enough and some businesses will fail. However, far more than with any lending bank or other financial institution, ETI has a vested interest in helping good quality, committed and honest licensees to survive, oVering not only valuable business advice but real financial concessions where appropriate. Finally, it must be understood that every individual contract between ETI and a tenant or lessee is initially negotiated and agreed by both parties, with complete transparency of every obligation that each party is undertaking. This includes full details of drinks product pricing, amusement machine pricing and share of income and a valuation of the rent payable having due regard for the terms of the lease. 80% of all ETI pubs are let on long term, assignable agreements in which subsequent operators (assignees) pay a capital sum (premium) to the original lessee (assignor) in order to acquire and enjoy the rights (and obligations) of such agreements.

In ETI’s experience, the vast majority of all tenants and lessees accept and abide by the terms of the contractual agreement they have made, regardless of the trading conditions they face and at ETI we remain convinced that the leased and tenanted business model continues to represent an unparalleled opportunity for entrepreneurial licensees to create a business generating real profit and long term value.

ETI’s Responses to the Conclusions and Recommendations of the Trade and Industry Select Committee, published on 21 December 2004

6. TISC observations and recommendation regarding the detrimental impact of listing and marketing fees. (Para 53 ) — ETI has never levied listing or marketing fees on any supplier of any products oVered for sale to licensees. The extensive portfolio of drinks available for sale is selected according to customer demand, product quality and logistical considerations.

7. TISC observations and recommendation regarding product range and consumer choice. (Para 61) — ETI recognises the benefits of providing choice to our licensees, who are able to select from a vast range of drinks products, sourced from local, regional, national and international producers. — Since acquiring former brewery-owned estates, ETI has massively increased the range of drinks available to all pubs, from all brewers, now comprising 11 standard lagers, 18 premium lagers, 59 keg ales, three , 98 premium and standard cask ales, plus 1,391 cask ales from small independent brewers (SIBA), 22 keg ciders and 106 diVerent packaged beers and ciders. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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8. TISC observations and recommendation regarding access to market from small, independent brewers. (Para 66) — ETI recognises the contribution that small, independent brewers can make to the range of beers on oVer in local, regional and national markets. — Cask ale continues to represent almost 13% of all beer and lager volumes sold in ETI pubs, almost double the national average and by working closely with the Society of Independent Brewers (SIBA) through their direct delivery scheme, 312 local breweries have supplied almost 1,400 diVerent beers to ETI pubs in the last 12 months.

11. TISC observations and recommendation regarding repairing obligations and dispute resolution. (Para 90) — ETI has a dedicated resource in place to manage the company’s repairing obligations and to conduct a formal programme of property repair inspections to ensure that both parties’ obligations are eVectively discharged. — ETI has also introduced mechanisms (dilapidations bond and repairs fund) by which outgoing assignors and incoming licensees can ensure that their repairing responsibilities are discharged in full without fear of recourse. — Our existing Code of Practice provides a straightforward escalation mechanism by which tenants may seek to resolve disputes arising from any aspect of their agreement with the company. — In the event that we fail to agree on the important matter of rent, our practice is to refer the dispute to independent experts or arbiters. — In the 24 months to September 2008, out of 2,687 rent reviews completed, just 15 have been referred to independent determination for settlement, of which nine have now been settled. — Arbitration should remain an instrument of “last resort” and we are encouraged that its infrequent occurrence would indicate that our existing escalation mechanisms operate eVectively. In the event that arbitration is necessary, we try to ensure that the burden of costs reflects the outcome. — ETI has worked extensively with the British Institute of Innkeeping during 2008 with the objective of producing a low risk, low cost, fast track solution to the independent expert determination of rent and expects to launch this over the coming months.

12, 13 and 14. TISC observations and recommendations regarding information disclosure upon initial let or assignment (Paras 103, 104, 105 and 106) — ETI provides, and draws to the attention of prospective licensees, extensive information relating to individual outlets before any decision to proceed with a lease is required. We do recognise our responsibility to ensure that tenants take proper notice of all the information provided, including professional advice where appropriate. — A high standard of due diligence is required in respect of the information provided and received during a lease assignment and best practice indicates that the assignor’s profit and loss account and a full property survey, should be the minimum requirement for disclosure purposes. — The ETI Retailer Pack and the ETI Guide to Assignment, (for both assignors and assignees), clearly detail the actions that all parties (including the Company) should take and the conditions that we expect to be met if we are to grant an initial lease or give our consent to assign. — ETI regularly refuses consent to assign until such time as the incumbent licensee (assignor) has fully complied with the defined repairing responsibilities under their lease agreement, thereby ensuring that a new licensee (assignee) commences occupation in a building which is fit for purpose. — Since 2004, all new ETI agreements include an express clause which enables the Company to refuse consent to assign unless the assignor provides prospective purchasers with a minimum of two years accounts. In all cases on assignment (even of a lease which predates 2004) we interview prospective assignees and, acting reasonably, would withhold our consent to assign if we have any doubts about the ability, preparedness or standard of due diligence of the assignee.

15 and 16. TISC observations and recommendation regarding the use of independent professional advice. (Paras 110 and 111) — ETI strongly advocates that prospective licensees should seek independent professional advice (financial and legal) before entering into an agreement and we provide new entrants with a list of independent solicitors who are familiar with our agreements. — During 2004, ETI introduced measures to make the requirement to take such advice an enforceable condition of purchasing an ETI agreement through assignment, such that all new licensees at Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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assignment must prove that their business plans have been reviewed and signed oV by an independent financial advisor. Since the introduction of this mandatory condition, almost 2,700 assignments have occurred. — ETI will also contribute £250 towards the costs of financial advice, for prospective licensees who progress to completion of an agreement, utilising one of a list of independent firms of accountants. — ETI has developed a new tenancy agreement, in which the continuing utilisation of a qualified trade accountant, to provide eVective management information and financial controls, is a mandatory requirement of the agreement.

17 and 18. TISC observations and recommendation regarding prices paid for drinks supplies. (Paras 124 and 125) — Discounts available in the market are broadly understood across the industry. However, the specific prices paid by ETI to its suppliers should have no bearing on the decision-making process for a tenant or lessee. The critical information required to enable a tenant to produce a business plan is the price, net of discounts, that the tenant is to pay for supplies. — ETI operates a variety of permanent discount schemes on beers purchased from the company and approximately 60% of licensees currently derive some benefit from these schemes, which are contractually protected under their agreement. (This excludes temporary discount concessions granted during a period of financial assistance.) — The proportion of an ETI licensee’s turnover accounted for by drinks purchased under the tie has reduced from approximately 61% (2005) to 55% of turnover in 2008. During this period, food sales, as a proportion of total sales, have grown from 17% to 21%. Profit from sales of food, as a proportion of total profit, has increased from 22% to 26%.

19 and 20. TISC observations and recommendations regarding the tie for amusement with prizes (AWP) machines and the allocation of machines share between tenant and landlord. (Paras 129 and 132)

— The Select Committee concluded, correctly in our view, that “the machine tie improves tenants’ takings from AWPs” and industry research clearly demonstrates that there are benefits in terms of absolute and shared income, security and transparency, derived from ETI’s involvement in the management and administration of machines. (Average takings in free-of-tie machines are 26% lower than in tied machines—source: National AWP supplier) — However the Select Committee subsequently made its recommendation to remove the tie for amusement machines based on the statement that “free-of-tie tenants make more money . . . from machines than tied tenants do . . .”. As free-of-tie tenants receive 100% of takings, whilst ETI tied tenants receive, on average, 50% of takings under their contract, this finding is self-evident, but does not provide a valid rationale for the removal of the machine tie, nor does it consider the consequences of doing so. — ETI operates a variety of machine tie agreements, ranging from entirely free-of-tie to sharing approximately 50% of the net takings. These alternatives are made clear to prospective licensees and can therefore be fully accounted for in their evaluation of the earnings potential from machines, its contribution to house business profit and its relationship to the total rent charged for the business. — Under existing tied machine sharing arrangements, the impact of the decline in income from amusement machines in pubs over recent years, exacerbated by the proliferation of other forms of accessible gaming (notably in betting oYces, on TV and via the internet) has been shared equally between ETI and its licensees. — Had ETI accepted the 2004 Committee’s recommendation, removed the machine tie and replaced the company’s “lost” income with a supplemental fixed charge, it is clear that ETI licensees would now be worse-oV, having exchanged a declining source of income for a fixed cost. No mechanism currently exists by which any such supplemental fixed charge might be reviewed to reflect changing circumstances. — During 2007, ETI introduced new share terms on AWPs, whereby the company carries all of the costs associated with the provision and operation AWP machines. These terms have proved to be very eVective in removing the risk of high-cost, low income machines to licensees and there are already 1,696 pubs with machines operating on these terms. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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21. TISC observations and recommendation regarding rent valuation (Paras 144 and 145) — ETI is obliged to assess the value of rent having due regard to the terms of the lease. This is not an accountancy exercise, but a valuation of Fair Maintainable Trade, constructed according to guidelines laid down by the Royal Institution of Chartered Surveyors and taking account of local market conditions and prospects. — The assumptions used in the construction of rent calculations are disclosed to licensees, together with an estimated and summarized profit and loss account which supports the rent assessment. This should never remove the responsibility for tenants to produce their own detailed assessment and business plan and ETI’s Code of Practice clearly details the rights and responsibilities of both the company and licensees in relation to the provision of information. — However ETI disagrees with the recommendation that a detailed profit assessment should form an addendum to a lease (on the basis that it would supposedly improve transparency). It is those assumptions which support the assessment of rent at the date of review which are pertinent, not those used at the time of an earlier assessment, whether such review is contractual or as a result of a Code of Practice request. It is also common business sense that any prospective licensee should take responsibility for the proper preparation of a meaningful business plan supporting the rent that he is agreeing to pay for the pub that he has chosen. — ETI believes that its approach to the assessment and negotiation of rent is open, transparent and fair, as reflected by the extremely small number of rent reviews that are referred to independent experts for determination, or remain overdue for settlement. Unsustainable rents are completely counter-productive, resulting only in dissatisfaction, instability, increasing the risk of business failure and greater cost to ETI.

22. TISC observations and recommendation regarding upwards only rent review (UORR) clauses. (Para 151) — ETI confirmed to the 2004 inquiry that it does not enforce any upwards only rent review clauses in any agreements in which such clauses were present and had not done so since 1997. — Furthermore, all ETI agreements developed since 1997 do not contain an UORR clause, but provide that the rent will be assessed at market value upon review, whether that is above or below the passing rent. — Since 2004, ETI has conducted 4,690 rent reviews 3,718 of which contained an express UORR clause which was completely disregarded. The average annual growth in rent arising from rent reviews throughout this period was below inflation at approximately 2.5%, including 162 reviews which resulted in a permanent rent reduction.

23 and 24. TISC observations and recommendation regarding sustainable rents and concessions. (Paras 158 and 162) — Through its fair rent policy and Code of Practice, ETI always seeks to ensure that rents are reasonable and sustainable, that its assessment of Fair Maintainable Trade is balanced and that tenants are treated fairly. — ETI acknowledges the subjectivity of both parties in the determination of Fair Maintainable Trade and a consequential assessment of rent, but would contend that the wealth of competition and comparable evidence available to the market ensures that ETI’s approach to rent is fair and sustainable. — ETI’s Code of Practice entitles any tenant, at any time, to request a review of rent should circumstances materially change. In the 12 months to September 2008, ETI has received and completed its evaluation of 37 requests for a Code of Practice review. Eight of these were declined and 29 have resulted in a permanent reduction in rent. — In appropriate circumstances, ETI will oVer non-refundable rent concessions or temporary trading discounts to support licensees who are experiencing short-term financial diYculty. Unsurprisingly, ETI will only provide such support where a licensee can demonstrate full compliance with all the terms of their agreement, the maintenance of excellent retail standards and the preparation and disclosure of detailed financial information which demonstrates sound business controls. — In the 18 months to September 2008, approximately 1,800 pubs have received direct, non- refundable financial assistance in the form of discounts and/or rent concessions, at a cost to the company of approximately £12 million to help them during current trading circumstances. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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25. TISC observations and recommendation regarding licensee training. (Para 165) — ETI strongly advocates the importance of training to prospective and existing licensees and, recognising that cost is a potential barrier, provides a wide range of flexible, low-cost and accessible training solutions, together with a money-back guarantee in the event that delegates believe that the course has failed to deliver its value-adding objectives. — The range of accessible training solutions available through ETI continues to grow and attendance levels are stable. Our money-back guarantee applies to every training course and to date there have been no applications for the reimbursement of course fees. — In 2006, ETI introduced the mandatory condition that all applicants for ETI pubs who do not have existing qualifications or a track record of successful operation in licensed premises, must attend the 5 day Business Foundation Programme, covering health and hygiene, employment law, basic financial management, marketing, merchandising and cellar management. In the last 12 months, over 600 delegates have attended the programme.

26. TISC observations and recommendation regarding the role and performance of business development managers (BDMs). (Para 171) — ETI believes it has been able to attract, train and retain a highly professional and experienced team of managers, who seek to uphold the values and standards expected of them, whatever situation they face. — ETI has invested significant sums in the training and development of its operational management teams and continues to do so. This includes the National Industry Training Awards (NITA) award- winning Associate Regional Manager programme, where candidates undertake a rigorous six month (minimum) training schedule before the prospect of taking up an operational role arises. Furthermore, the Association of Licensed Multiple Retailers (ALMR) has recently named an ETI Regional Manager as its 2008 Operations Manager of the Year. Five other ETI Regional Managers had also been considered in the final evaluation stages of the competition.

27. TISC observations and recommendations regarding tenant support and complaints procedures. (Para 177) — The provision of high levels of service represents good business practice and is an important diVerentiator for ETI versus its competitors. Unlike many business franchise agreements, ETI does not force licensees to utilise any specific services and does not charge additional franchise fees for any of the services provided. — The eYcient and eVective handling of complaints also represents good business practice and the company operates an escalation procedure which helps to ensure that complaints can be resolved to the satisfaction of both parties. These principles are detailed and enshrined within our existing Code of Practice. — Howsoever received by the company, all written complaints and the company’s responses to them are reviewed by a Board Director.

28, 29 and 30. TISC observations on the balance between the costs and the benefits of the tie. (Paras 188, 198 and 199) — ETI concurs with the Select Committee’s assessment that the tie usually balances the costs and benefits available to tenants and that the existence of the tie provides demonstrable benefits to both tenants and customers alike. In drawing this conclusion, the Select Committee’s observations are consistent with those of each of the 8 previous reviews conducted by various regulatory bodies since 1969. — ETI acknowledges and has to contend with, the main argument it faces from detractors of the tie, who may selectively highlight the diVerence in prices charged for tied products (when compared with those available in the free market) whilst taking little or no account of the many other tangible and intangible benefits which the Company oVers. — ETI also has to contend with the disingenuous interpretation, by campaigners such as Fair Pint, of elements of the TISC (2004) inquiry in relation to the tie. This includes the promotion of the entirely false notion that TISC (2004) concluded that “the tied tenant should be financially no worse oV than the free of tie tenant”, thereby completely ignoring the many other benefits which the TISC (2004) review recognised were provided by the pub companies. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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— ETI is continually developing the range of services and support mechanisms available to licensees, but does not expect every licensee to place equivalent (or even any) value on every individual element of support oVered. — As described in the introductory paragraphs to this submission, the strength of the tenanted and leasehold model and the positive contribution of the tie towards the alignment of interests between ETI and its licensees has never been more obviously and demonstrably evident than during the current period of weak consumer demand and challenging trading conditions.

31. TISC observations and recommendation regarding Codes of Practice. (Paras 203 and 204) — ETI supported the recommendation that a comprehensive industry-wide code of conduct should be developed by the industry’s trade associations, drawing on all the best practices of landlords and licensees and is aware that such an exercise was completed by the British Beer and Pub Association (BBPA) on behalf of its members. However, it is important to note that approximately 12% of UK tenanted and leased pubs are owned by companies and individuals who are not members of BBPA and therefore not subject to its framework code. — The ETI Code of Practice is an essential part of the proposition we make to prospective licensees and is regularly reviewed and updated to ensure that the Company is competitive and remains at the forefront of best practice. — ETI was a prime mover in the establishment of the British Institute of Innkeeping Benchmarking and Accreditation Service (BIIBAS) and was the first company to submit its Code of Practice for accreditation, which was subsequently received. BIIBAS has confirmed that, since its accreditation, there has been no occasion on which there has been cause to contact ETI regarding a complaint that a breach has occurred. 29 September 2008

Supplementary memorandum from Enterprise Inns I am writing further to our attendance at the BEC inquiry oral evidence session on 9 December 2008, to provide further information as requested. Specific information was both referred to and requested at the inquiry hearing and this is dealt with in Section 1. In addition the Chairman commented that there were other areas which the Committee may have wished to cover, and that we should provide any other information which the Committee may find useful. I have included such matters in Section 2.

Section 1

1.1 Q208 “moronic MP” I have included as Appendix 1 copies of the exchange of letters between myself and Greg Mulholland MP (GM), detailing matters at two Enterprise (ETI) pubs—the Red Lion, Otley and the Three Horsehoes, Otley (not printed here). The outline of events was as follows:

Red Lion 10/3/08—letter from GM “very concerned that ETI are trying to substantially increase the rent” 18/3/08—response from ETI confirming NO increase in rent 17/4/08—letter from GM “delighted to learn no increase” and “thankyou for supporting Otley pubs” 15/8/08—letter from GM “horrified to hear that ETI is willing to inflict a substantial increase in rent . . . forcing establishment to close down” 26/8/08—following detailed briefing by GM “attacking the company”, this matter was reported extensively in the Wharfedale & Airedale Observer 26/8/08—letter from ETI reminding GM of the facts and requesting correction of statements to newspaper—no response Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Three Horseshoes

22/10/08—letter from GM “astonished and horrified . . ..” at his interpretation of events as detailed 31/10/08—detailed letter from ETI with factual version of events—no response 6/11/08—notwithstanding the facts provided by ETI this matter was reported extensively (front page) in the Wharfedale & Airedale Observer, following detailed briefing by GM 6/11/08—matter raised in parliament by GM (Hansard column 362) 20/11/08—retraction and apology published by Wharfedale & Airedale Observer Given the damaging nature of the unfounded comments and allegations made by Mr Mulholland in relation to the Three Horsehoes, and the absence of any attempt by Mr Mulholland to correct matters, ETI has had no option but to take legal advice in order to protect its reputation.

1.2 Q234 and Q235 Buying out, fraud and contact with the authorities On the matter of potentially fraudulent activity, and such information as is provided to the relevant authorities, I would make the following comments: Firstly, it is important to put this matter into context. In relation to licensees who choose to breach the terms of their contract and purchase products outside of the tie, I was making the point that there is potential for fraud to arise. I therefore reported to the Committee that “were each of our pubs to buy, outside the tie, one barrel a week, we would lose £7.8 million in income. For the Treasury, (. . .) were they to be purchased for cash and were they then not to appear in the books of the pub, there would be VAT, income tax and corporation tax fraud amounting to £8 million”. Over the years we have been contacted by HMR&C on a number of occasions relating to their role in addressing such matters as illegal importing and tax fraud and have cooperated by providing information which enables HMR&C to pursue tax inquiries as they see fit. As part of this cooperation, we agreed to identify the source of supply of purchases made outside the tie, in order that such information might be used to further prosecutions against said wholesalers. Buying outside the tie can take on many guises. At one level, legitimate wholesalers supply our pubs with products which the licensee has a contractual obligation to purchase from ETI. When we discover such breaches of contract, we oVer the licensee the opportunity to remedy the breach but at the same time make it clear that a second oVence may result in termination of the lease. In general, we have no reason to suspect that licensees in these cases are engaged in tax fraud. At another level, we discover that some licensees, often in concert with a wholesaler, have fitted special devices designed to bypass, or disrupt, our flow-metering equipment, their objective clearly being a more substantial breach of contract. We related two such incidents to the inquiry, in SheYeld and North London, where we had uncovered evidence of material purchasing outside of the tie amounting to some £130,000 worth of beer. We have not yet been able to confirm unequivocally the detail of the suppliers, but we are continuing to pursue this information, and will cooperate with HMR&C by providing disclosure of such information as becomes available. Following our dialogue with you at the recent inquiry, we are collating the details of some 250 instances in the last twelve months where we were required to breach and terminate an agreement on account of failure to comply with the terms of the tie. We intend to pass this information onto HMR&C. Finally, at the most sinister level of activity, there have been occasions when both ETI staV and licensees have been subject to intimidation and even physical abuse from individuals who have been illegitimately supplying our pubs with products which the licensee has a contractual obligation to buy from ETI. Clearly there may be wider motives at stake here in addition to potential tax evasion, and we report all such incidents to the police as and when they occur.

1.3 Q290 Special buying deals and advantages of the tie In the matter of the services and benefits which are available to licensees who are tied to ETI, I have enclosed as Appendix 2 a detailed listing of both tangible and intangible financial benefits which are provided by ETI. This schedule was originally submitted to the TISC 2004 inquiry, but has been updated to take account of the many developments which have been introduced in the years since. I would make particular note of the training package “Winning in Local Market Areas” which is provided to all new licensees at no charge and the availability of special terms on a whole range of non-tied goods and services. We negotiate through a third party (Leisure Supply Group) to secure advantageous terms on a huge range of ancillary goods for licensees. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Whilst we do not have access to the detailed purchases made, nor the details of the individual licensees who made them, we do know that in the last twelve months over 5,000 licensees have taken advantage of these deals, having made over £15 million of purchases and securing an estimated £3.5 million of savings (data provided by Leisure Supply Group). I can confirm that Enterprise Inns makes no profit whatsoever on sales of such non-drinks items. I would also highlight the substantial investment we have made into our own operational staV over the last few years, through training and development, and the new systems and tools we have developed to enable our field-based regional managers and property managers to spend even more time in front of licensees. We are currently delivering some 30,000 quality business appointments per year through regional managers and a further 8,000 property management reviews at pub level. Of course, in this recessionary climate, licensee support goes far beyond the “normal” level of services and value-added benefits described above and in Appendix 2. As we have confirmed in our Interim Management Statement issued on 22 January, additional and direct financial support is currently being provided by ETI to its licensees at a rate of some £16 million per year. I have also enclosed, as Appendix 3 (not printed here), an article published in the Morning Advertiser on 21 January reporting the views of Christie & Co regarding the approach that companies such as ETI are taking towards rent during current trading conditions, when compared to institutional landlords.

Section 2Additional Information

2.1 Insurance An area of activity which has been misreported by detractors of the tie is the matter of buildings and contents insurance, where it has been suggested that pubcos act to the disbenefit of tied licensees. The facts of the matter are these. Every year, ETI recharges insurance to licensees based on the claims history of the business, the market for buildings insurance and the cover that is available. In 2008–09 ETI is liable for the first £500k of every claim. There are two key commitments that we make to every ETI licensee: (i) We guarantee to provide insurance for every single licensee, including those who would simply not get insurance in the market. This includes those pubs which have recently suVered repeated, and sometimes devastating, flood damage. (ii) We ensure that every pub pays a premium which is appropriate and we guarantee to match the best rate available in the market for cover of equal quality. To put this into context, in the 12 months to the end of September 2008, we received only 46 queries in relation to the costs of insurance cover. Just four pubs subsequently had their insurance charge reduced. Whilst on the subject of insurance, I can confirm that the claim made by Mr Jacobs in evidence given to the inquiry that “pubcos have a two year insurance policy which pays up when someone walks out of a pub”, is entirely false. ETI incurs all of the cost and suVers the entire loss of income when a pub closes.

2.2 Rent assessment and the tie There is an active market for tied-pub rent valuations, which takes account of the individual pub, the specific agreement and the local marketplace and on the whole it works. “Over-renting” a pub is completely counter-productive, leading to an increased likelihood of debt and outright business failure. Furthermore, “over-renting” is likely to result in limited future growth prospects, limited assignment prospects, a lack of reinvestment, disillusioned licensees and ultimately the complete breakdown of our business relationship. The rent bid for a particular premises is based on an assessment of the Fair Maintainable Trade for that outlet—encompassing estimates of volume, turnover, gross profit, overhead costs and net profit—and takes due account of the specified terms of the lease or tenancy on oVer. This includes the exact terms of the tie. I believe that the arguments against the tie, as put to the Committee by a number of detractors, are fuelled substantially by self-interest and do not hold water. It is particularly frustrating to know that Vince Power, who we are led to believe is financing the Fair Pint campaign, has recently advertised for assignment two licensed premises which operate under ETI tied leasehold agreements. I have enclosed at Appendix 4 (not printed here) the published sale particulars for the VPMG portfolio of licensed premises. These prove that the ETI leases (Moose Bar and The Camel) enjoyed rents (as a percentage of turnover) which were less than 50% of those charged for the free of tie leases and were being oVered for assignment sale at OIRO £500k and £450k respectively. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Outlet Tie type Turnover pa Rent pa Rent % of T/O Total cost % of T/O Bloomsbury Free of tie £1,193k £200k 16.8% Ballroom Moose Bar ETI lease, beer £1,103k £92.5k 8.4% 12% and cider tie Ion Bar Free of tie Pro rata £650k £100k 15% Camel ETI lease, beer £937k £67k 7.1% 14% cider tie Spiga Bar Free of tie £1,230k £172.5k 14%

Even after adding the “wet rent”, which is eVectively the estimated beer discounts that each site would get if it were free-of-tie, the total cost under an ETI lease, asa%ofturnover, is still favourable to that of the free-of-tie leases. I don’t believe that such sale prices and rent levels would indicate a model which acts in any way other than to the benefit of both ETI and its lessee, in this case Mr Vince Power. Even Mr Morgan, who has made no secret of his support for the Fair Pint campaign, stated in evidence to the Committee (Q80) that “the existing method (for assessing rent) is eminently fair, if it is operated in a fair, open, and transparent manner”. We agree entirely.

2.3 Arbitration We referred to arbitration on a number of occasions and it remains our steadfast view that on the grounds of cost and disruption alone, arbitration should only be used as a last resort to settle matters when all other mechanisms have failed. We remain reassured by the relatively infrequent use of arbitrations within ETI (just six in the last four years). However in recent cases involving specific advisers (Mr Morgan and Mr Jacobs, acting as experts for our retailers), independent arbitrators awarded rents far greater than Mr Morgan and Mr Jacobs contended should be payable. In the case of the Portobello Gold in Notting Hill (leased from ETI by Mr Mike Bell), the rental award of £76,500 made at arbitration is more than 100% higher than the £30,500 oVered by Mr Bell, as advised by Mr Morgan, and some 16% higher than the £66,000 which ETI had oVered. As a consequence, Mr Bell is now liable for not only his own costs, but also ETI’s costs in this entirely unnecessary arbitration. In the case of the Frog and Bullrush in Warwickshire, the lessee was paying a rent of £16,040 before the rent review. ETI made an oVer of £23,000 but Mr Jacobs, acting as advisor to the lessee, oVered £4,328. The award made at arbitration was £25,000, more than 400% higher than that oVered by Mr Jacobs. ETI were again entitled to recover costs from the lessee concerned but opted not to do so on the grounds that the lessee had been so misled by her adviser. These are rent reviews which should never have gone to arbitration, and would not have done so had the proposals made by Jacobs & Morgan not been so misguided and so far below what any reasonable person would consider to be a fair, and sustainable rent, having due regard to the lease terms. We agree that the high cost of arbitration may be prohibitive for some licensees and recognise the need for a low cost, easy access process by which rent review negotiations may be independently resolved. In this respect, we continue to support and assist the British Institute of Innkeeping (BII) in the development of a new, low cost solution.

2.4 Rent review A rent review is most eVective when both parties are knowledgeable, open and professional, cooperate fully and exchange information which supports their position. At the invitation of BII, we have therefore recently been training licensees in how to undertake a rent review, and anticipate repeating these well attended events in the forthcoming year. I have also attached for the Committee’s information at Appendix 5 (not printed here), two highly informative articles advising licensees on the process of rent reviews, written by independent consultant Phil Dixon, CMBII and Barry Gillham, Chairman of Fleurets.

2.5 Indexation It has been suggested that indexation of rent on an annual basis is the equivalent of an upward-only rent review. I wish to make it clear that indexation of rent is not a rent review at all—it’s what happens to rent between rent reviews. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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If anything, indexation substantially lessens the likelihood of a significant change to the rent at the time of review, the rent having been adjusted to take account of inflation during the period between cyclical reviews (typically every three or five years). Indeed many people actually prefer the “smoothing” eVect of indexation between rent reviews. All new ETI agreements state that rents will be “adjusted” in line with RPI, whether upwards or downwards, and in the current period of rapidly falling inflation this will serve to limit, or even remove, annual increases for licensees with indexed agreements. As with all other matters relating to rent, ETI’s policy (as defined in our Code of Practice) supercedes anything in a lease agreement and allows a licensee at any time to invoke a formal review of their rent if they believe that it is inappropriate.

2.6 Rent concessions We have detailed the actions taken by ETI in relation to the provision of financial support to licensees through rent concessions and special discounts. It may however help the Committee to understand the process by which such a concession is achieved by reference to an article by a licensee “How to get a concession from your Pubco” which was published in the Publican newspaper in February 2008, a copy of which I have enclosed at Appendix 6 (not printed here). I would also reiterate the statement we made in evidence to the inquiry that in providing financial assistance to deserving licensees, whether by adjustment or concession to rent or through additional discounts given, these sums are not refundable to ETI and suggestions to the contrary are entirely false.

2.7 Upwards only rent reviews (UORR) As is widely known and was acknowledged by several witnesses in evidence, ETI does not enforce any UORR clauses in any of its agreements. The ETI Code of Practice explicitly supercedes any UORR clause. I would take this opportunity to correct the evidence given by Mr Morgan (Q105) who stated that “ETI do not oVer to waive UORR at arbitration, but do honour it if asked”. This is an untrue statement. ETI explicitly instructs arbitrators to ignore any UORR, as occurred in the arbitration of a rent review with another witness to the inquiry, Mr Clarke. I would also rebut the evidence given by Mr Jacobs (Q9) in relation to ETI’s stance on UORR, who stated that “ETI substitute the removal of the UORR clause with something else like a wider tie”. This is also an entirely untrue statement.

2.8 Retail pricing It was suggested in evidence to the inquiry by Mr Daly that pubs which are tied are disadvantaged by their pricing policies over those which are free-of-tie. There is no straightforward economic reason why any pub should not be able to charge any price for any product, as is ably demonstrated by Mr Daly who charges identical retail prices in his ETI tied pub (Roadtrip—www.roadtripbar.com) as he does in his free-of-tie operation (Zigfrids—www.zigfrid.com) less than 400 yards away. Retail pricing is based on the retail proposition that is being oVered and local market competition, taking account of costs. I have enclosed for the Committee’s information at Appendix 7 (not printed here), an extract from a piece of research produced by Numis Securities which I referred to in evidence (Q246), and which states that “. . . tenanted pub drink prices in ETI (are) still below those of most regional brewers and managed pub companies”.

2.9 Assignment There is an active market (albeit lessened in current trading conditions) for the assignment of leases. Over 50% of all licensees who occupy an ETI pub have paid a capital sum to the previous licensee for the right to do so and thereby take over the remaining term and conditions of a contract with ETI. In a quite disturbing example of misinformation, it was suggested to the inquiry by Mr Jacobs (Q31, 32, 33) and Mr Daly (Q33) that ETI does not provide a previous tenant’s profit and loss account to an incoming tenant at assignment. It is critically important that the Committee understands that ETI does not have access to a tenant’s profit and loss account at assignment, nor at any other time (unless a tenant chooses to share the detail with ETI). An assignment transaction takes place between an outgoing tenant and an ingoing tenant, as was the case with Mr Daly. An ingoing party is able to, and indeed should, take independent advice and conduct due diligence to satisfy themselves as to the accuracy of the information with which they are provided. ETI does however reserve the right to refuse consent to assign should an ingoing tenant feel that they are not being provided with the information they require from an outgoing tenant. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Contrary to the evidence provided to the inquiry (Q33) at no time did Mr Daly advise ETI that he could not get the information he required prior to completing his purchase of an ETI lease from an outgoing party. I would be happy to provide, for your further information, a copy of the business plan prepared by Mr Daly prior to his taking on the lease at the Road Trip if this would assist the Committee’s understanding that Mr Daly knew exactly what he was taking on.

2.10 Cooling oV period

All new ETI tenancy agreements allow for six months’ notice to be given by the licensee at any time during the term of their agreement. However it is important to make clear that where an agreement is acquired through assignment (as occurs in over 50% of the licensees in ETI pubs) there is no cooling oV period for the incoming licensee, since their transaction has been completed with the outgoing licensee, and not with ETI.

2.11 Regional Manager accompaniments

As I stated in evidence to the inquiry, I would urge Committee members to meet with our ETI Regional Managers and/or Divisional teams in order to understand at first hand the issues with which they are dealing on a daily basis. I am delighted that to-date, I have had positive responses to this suggestion from the Chairman, Mark Oaten, Brian Binley, Julie Kirkbride and Anne MoVatt, to which end we are making arrangements to suit their particular availability. Should any other Committee members wish to take up this oVer, I know you are in direct contact with Simon Townsend to make suitable arrangements.

Conclusion

These are times of great challenge for the UK economy and for consumer facing businesses in particular. Licensees across the pub industry, whether in free houses or leased and tenanted pubs, are battling with substantial cost increases, led not least by alcohol duty increases materially above the rate of inflation. May I commend to the Committee two recently published works—the BBPA “Wake Up for Westminster” document and the Report into Community Pubs by the All Party Parliamentary Beer Group, which followed an extensive investigation over a two year period. The APPBG report makes many relevant conclusions as to the range and nature of the issues facing the pub industry and a number of substantive recommendations, including: — Better sponsorship for pubs across Government. — The need to address the irresponsible promotion of low price alcohol in supermarkets. — The need to increase stakes and prizes for AWPs in pubs—and reduce gaming machine duty. — A simpler planning process to aid diversification for pubs. — Licensing to be made simpler and cheaper. — Proper enforcement of existing legislation before any further creep in regulations. — Easier access to funded training to enable diversification. — Rate relief and rateable values to reflect pubs’ contribution to communities. Whilst the current trading environment is undoubtedly bringing significant financial pressure to bear on both licensees and pub companies such as ETI, I would remind the Committee that the conclusions of the 2004 TISC inquiry, along with those of every other review of the tie, were that “the tie usually balances the costs and benefits available to tenants and the existence of the tie provides demonstrable benefits to both tenants and customers alike”. Despite the well orchestrated and over publicised antics of the Fair Pint campaign and others, it remains my view that the leased and tenanted model is well placed to respond to current trading challenges and that the beer tie firmly and beneficially aligns the interests of ETI with its licensees. I hope that this letter and its enclosures provide the committee with the required information. Should you have any further queries or require clarification on any matter, please do not hesitate to contact me. 2 February 2009 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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APPENDIX 2

SUBMISSION BY ENTERPRISE INNS PLC

APPENDIX 11—SPECIAL COMMERCIAL OR FINANCIAL ADVANTAGES The Company oVers a wide selection of tangible financial benefits, in addition to an extensive range of intangible business support services.

Regional Manager Business Support Services — Dedicated Regional Manager. — Regulatory advice. — Business planning support to guide retailers in: — Developing the retail proposition for their local market place. — Target marketing activity at appropriate consumers for their retail oVer. — Utilising consumer research and local demographic information (Experian) to highlight target groups. — Analysing appropriate cost structures to maximize profit Regional Manager retail toolkit. — Pub quality assessment and retail standards audit. — Cost scheduling. — Marketing and promotional advice. — Strategic business plan for every pub Accountancy support packages. — Preferential rates for trade accountants such as Milestones to provide comprehensive accounting and overhead control packages — Buying Group Discounts—increased discounts on capital equipment, frozen/fresh foods, bar sundry equipment, utilities. — Wine menu printing service Free PR service. — Joint capital development projects. — Specific financial support geared to individual pub and retailer requirements to address challenging market conditions.

Marketing Support Services — Brand marketing support. — Free catering advice/support—menu planning and printing. — Pub Marketing support (mail shots to encourage consumers into pubs, 2-for-1 meal deals in national media). — Provision of free Point of Sale materialfrom brand owners. — Access to subsidized quality banners, posters and other printed advertising material. — Provision of a free website to access appropriate support and advice to get the most from your pub—www.enterpriseinns.com — Marketing and advertising launch packages (new business/capital developments). — Special oVers/deals on drinks and other products/services. — Consumer research information—demographics, competitor analysis.

Property Services — Free advice on property matters from qualified property professionals. — Free access to Enterprise contractor and consultant database. — Free access to 24hours 7 days per week property helpdesk service for HACCP’S/Health and Safety issues. — Free advice on statutory legislation. — Free advice on party wall and boundary disputes. — Free interior design advice. — Free advice on risk management and property insurance. — Cellar Cooling maintenance: Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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— Option to take advantage of specially negotiated rates (85% of estate have voluntarily signed up to a cellar cooling maintenance programme. As part of this oVer replacement units are free of charge on a 10 year rolling replacement programme which would cost between £2,500— £4,000 on the open market). — Health and Safety Statutory Compliance Service: — Option to take advantage of services covering electrical wiring, PAT, fire alarm and emergency lighting testing, Gas appliance testing and lifting equipment appliance testing and H&S on. site training and access to templates, training modules for staV and advice on all matters relating to H&S at agreed rate of £1000 per annum, generating savings to ETI retailers of £1,000 per annum.) — Heating and Boiler Maintenance: — Option to take advantage of specially negotiated rates. (As part of this oVer, replacement units are free of charge on a 15 year rolling replacement programme which would cost between £4,000 and £10,000 on the open market)

Training and Recruitment Services All Training is either free or subsidised and includes — Mandatory Business foundation course for all new pub retailers. — WILMA—winning in your local market area—free to all new retailers. — Cellar Quality BII. — Finance levels 1,2 and 3. — Statutory Training: — First Aid. — HACCPS. Continual development of new support courses—currently under development and testing FRED— food retail education and development. — Lease assignment service. Free. — Extensive new licensee support—free membership to trade organisations.

Financial and Insurance Services — Contents insurance package. — Guaranteed contents/building insurance regardless of location and history. — Rating service—No charge to licensees (would cost in the region of £600 for 5 year period). — Financial assistance with cost of ingoing/deposit buildings.

Leisure Machines Services — Operators comply with exacting standards of performance. — Rigorous testing of gaming product ensuring any new machines maximise income potential. — We work directly with UK and foreign manufacturers and software developers to stimulate product initiatives. — Ensure that all permits and licenses are in place. — Licensees do not have to enter into supply agreement with an Operator for a given term. — The company ensures that any anti fraud security upgrades delivered by the Operator.

Supplementary memorandum from Enterprise Inns (regarding individual cases) I am now in a position to address the various submissions that were made to the BEC inquiry by a number of current and former Enterprise licensees. I have summarised my assessments of each case below, but have also attached the more detailed responses that have been made to each case by members of my staV who are most familiar with the circumstances. In the case of the Eagle in Battersea, I have also included a letter from James Dickson, Chief Executive of Brulines plc, who has addressed some of the more technical issues raised regarding the use of flowmetering equipment. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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In relation to the matters raised by Mr Law, my summary assessment is as follows: 1. There has clearly been some antagonism between Mr Law and the landlord (previously Whitbread and since 2002 ETI) ever since he was unsuccessful in his application to take on the original lease. 2. There also appears to be a history of issues relating to dispense data, initially between Mr Law and his then employer (the lessees), and latterly between Mr Law (as joint lessee) and ETI. The grounds for concern (on the part of ETI) have always been valid, albeit the explanation eventually provided (by Mr Law and Mr Clarke) has led to resolution of the issues. 3. Mr Law makes a number of spurious and unfounded assertions in his submission which are not supported by fact or evidence. 4. Mr Law appears to be on something of a campaign in relation to the use of beer monitoring equipment, raising a number of questions over accuracy and process. None of these issues stand scrutiny, and I enclose a detailed response from the Chief Executive of Brulines which addresses each issue in turn. 5. Mr Law and Mr Clarke (who has provided evidence separately to the Inquiry), having paid £125,000 for the remaining term of the lease for the Eagle, have now made several attempts to change the basis of the terms of the agreement they initially purchased. Sadly, this has not provided a sound base on which a productive and constructive trading relationship between ETI, Mr Law and Mr Clarke could be based. In relation to the submission by Mr D, my summary assessment is as follows: 1. Mr D has sought to completely re-invent the circumstances which led to his bankruptcy, indeed with the benefit of hindsight justification, now seeks to blame Enterprise entirely for the financial situation he allowed himself to get into, owing substantial sums to HMR&C. 2. Mr D failed to resolve a four year dispute which led to HMR&C petitioning for his bankruptcy. At no time during this period did Mr D raise concerns or complaints in relation to the profitability of the three sites he occupied under Enterprise leases. 3. Mr D’s submission to the inquiry is littered with fabrications and innuendo, none of which is supported by the documentary evidence we have. 4. Following Mr D’s departure, at his own request, from St F’s, all matters were handled by administrators acting on behalf of Mr D’s creditors, of which Enterprise were one. Enterprise did not recover all of the monies owed by Mr D. 5. Mr D makes a scurrilous and entirely false insinuation in relation to the recent fire at the St F’s. I can confirm that all statutory compliance certificates were in place at the time of the aforementioned fire, and it is the preliminary conclusion of the Fire Brigade investigation that the incident was caused as a result of a burning chip-pan, inadvertently left unattended by staV at the premises. I am pleased to report that the individual who was hurt in this incident is now recovering. 6. Finally, I can confirm that the total number of licensee changes in all three pubs since Mr D left occupancy is six, and in only one case was that as a result of a failed substantive agreement. All other occupancies were on a temporary basis while we sought new substantive tenants. In relation to the submission by Mr C, my summary assessment is as follows: 1. We were unable to agree the terms of the rent review, as the level of information disclosure by Mr C was poor, and despite several expert valuations being produced at Enterprise’s cost. Mr C eventually appointed David Morgan (founder of the Fair Pint campaign) to act on his behalf, and we were able to agree the level of rent payable based on a detailed proposal made by David Morgan. 2. Until that point in time, no rent oVer had been made by Mr C, for which reason Enterprise only agreed to pay Mr C’s costs for the period after the oVer was made and accepted. 3. Mr C has continued his policy of non-disclosure by failing to provide any factual information to support his claim for financial assistance, nor allow the installation of flowmetering equipment with which to validate the trade at the pub. The company has therefore been unable to agree to provide financial support. Mr C has responded by detailing his version of events to local news and TV media. 4. Mr C is a vocal critic of Enterprise, and of pub companies in general, and we have been unable to form the basis of a sensible working relationship with him. 5. The area around Skewen has suVered long term economic decline, and a number of pubs have closed in recent years, which should provide Mr C with the opportunity to grow his business. Enterprise owns a number of pubs in Skewen and the surrounding area, some of which are extremely well run by long-established retailers, and others are being very eVectively operated by temporary tenants and managers to restore damaged businesses. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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In relation to the submission made by Mr M, my assessment is as follows: 1. Notwithstanding the fact that there clear diVerences between Mr M’s description of his period of occupation of the Blaenogwr and the company’s documentary evidence, this does appear to be a very unfortunate case of a business failure despite the best attempts of Mr M and the company. In relation to the submission by Mr K of the Crown and the Town Hall Tavern, my summary assessment is very straightforward: 1. Mr K occupies two Enterprise pubs on entirely diVerent agreements—one attracts discounts and the other doesn’t. 2. Mr K and his business partners entered into a brand new, non-discounted lease at the Town Hall Tavern, with full knowledge and understanding of the prices attached to the lease, and their impact on the rent payable for the pub. Enterprise leases are entirely clear regarding the purchasing obligations entered into by lessees. 3. Mr K has wilfully breached the terms of his lease by purchasing drinks supplies from an unauthorised source (albeit his other ETI leased pub) at terms that are incorrect in relation to the level of rent paid at the Town Hall Tavern. 4. On 3 February 2009, damages equivalent to the level of margin lost by the company were agreed and accepted by Mr K, and he has been allowed to remedy the breach and remain at the pub. In relation to the submission made by Ms W, this case has taken up an immense amount of management time over the course of the last few years, and remains completely unresolved. I would summarise as follows: 1. There has been not one single occasion on which Ms W’s allegations and complaints have been supported by the facts and the documentary evidence available, yet this has not stopped Mrs W from embarking upon a completely unjustifiable campaign of actions against the company, including a court action for alleged harassment. 2. Every occasion on which the company has been required to defend its actions have resulted in judgements in the company’s favour. This specifically includes the action for alleged harassment which was thrown out by a judge on the grounds that Ms W’s claims were “totally unfounded and without any merit whatsoever”. 3. Ms W was ordered to pay all the costs of the actions she has taken, and has consistently failed to do so. 4. Ms W’s trading account with the company has continued in arrears, despite the company agreeing a new rent level for the business with Ms W and her adviser David Morgan. 5. At the date of writing, Ms W has still not complied with her statutory obligations to provide electrical safety certificates for ...,norcomplete the works under which such safety certificates would be granted. 6. In summary, I have to concur with the observations and inferences of our Divisional Director who has overseen the relationship between the company and Ms W over a number of years, that Ms W has comprehensively failed to make a success of her business at...notleast as a result of the amount of time, energy and money she has expended on a completely unjustifiable campaign against the company. 7. Should the committee require it, we have extensive records of documentation and correspondence relating to this case which support the company’s position throughout. I hope that the observations above, when combined with the detailed responses provided by my staV, demonstrate that in the cases represented by these submissions, Enterprise staV have always sought to act in a professional, transparent and mutually acceptable way during the period of our business relationships with licensees. Unfortunately, there are, and will be, occasions on which we have to take robust action in order to protect the interests of the company, but I am satisfied that in these cases, my staV have taken the appropriate course of action for the right reasons. 20 March 2009

Letter to Enterprise Inns from Brulines dated 3 March 2009 Re: David Law Submission to BEC As requested I am writing to provide Brulines response to parts of the David Law submission to the BEC enquiry.

It is worth underlining that Brulines’ core purpose is to provide operational transparency to operations in pubs. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Our core service consists of: — Monitoring of dispensed draught beer volume trends utilising the highly reliable Titan Pelton Wheel flow meter, and remote harvesting of the data. — Report production including weekly comparison of draught beer dispensed against draught beer oYcially delivered by the pub company supply chain to the pub. — Customer Data Analysis on a weekly basis which includes identification and removal of line cleaning, rectification of data anomalies, and analysis of variances between delivery and dispense trends including potential buying out. — Customer Account Manager and Data Advisor support to directly address potential buying out and reconcile discrepancies with licensees and customer representatives.

Brulines provide reports and identify trends which allow Pub Companies and licensees to run more eYcient businesses.

Good honest licensees who uphold their legally binding contracts with the pub companies use the system to help improve their business whereas others attempt to discredit and bypass the system for greed and or need driven reasons: — Access free market discounts that free hold pubs can access ie they won’t take a mortgage out to buy a free of tie pub but they want the discounts that it attracts despite having knowingly entered into a contractual agreement to be tied to purchase supplies through the pub company. A case of wanting the cake and eating it. — Avoid paying taxes by buying beer for cash on the grey market. In doing so they can avoid VAT and business tax, and also avoid national insurance by paying bar staV in cash earned from undeclared retail sales. — In some cases unscrupulous licensees take unoYcial supply from nearby free trade pubs which have volume over rider targets with the brewers.

The Brulines system is eVectively the industry standard management information system for draught beer operations. It allows the key stakeholders to look at one set of factual information, forming a basis on which investment, fair rent, and business support decisions can be made.

The submission from Mr David Law consists of inaccurate and misleading assertions which I address below.

Mr Law—This system is known as Brulines and was founded by Derrick Collin who in 1986 was convicted of conspiracy and blackmail.

This point is irrelevant as the integrity of the system is not directly related to the personal history of Derrick Collin.

In the article evidenced by Law, the journalist Edmond Jackson of the Telegraph questions whether or not Derrick Collin’s conviction was disclosed to investors, not the integrity of the system or indeed Brulines as a company. He goes on to suggest investors should hang on to their investment. “I am not implying that CBS shares are a write-oV. Its Brulines subsidiary is the market leader in its specialist area and investors should hang on”.

For the record Brulines has since March 2003 been managed by chief executive James Dickson during which time he has overseen a management buyout from Derrick Collin in May 2005 followed by a successful flotation in October 2006. Becoming a listed public company entailed satisfying significant commercial and legal due diligence.

Dickson, BSc Civil Engineering, MBA (IMD, Lausanne) Chartered Director (Institute of Directors) had previously held senior positions in Scottish & Newcastle and Whitbread.

Mr Law—The system is based around a very simple flow meter commonly used in plumbing and can be bought over the counter in any plumbers merchant for approx 24p

There is no truth in this statement which seems to be based on ignorance and a lack of understanding of our market leading system. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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The Titan flow meters used in dispense monitoring installations are not commonly used in plumbing and are not commonly available over the counter in plumbing merchants.

The price quoted by Law is understated by a factor of c.70 times and is therefore spuriously inaccurate.

Mr Law—The problem lies in the fact that the analysts of the data at the Brulines HQ have to guestimate the quantities of water that the Lessee pulls through the dispense system to clean the beer pipes

Brulines Customer Data Advisors are trained to identify and highlight as water any volumes within trading hours that may be attributable to the process of flushing the lines with clean water when changing from empty to full cask containers.

Whilst the practice of flushing between casks is common place it should not be confused with the correct cleaning methods widely recognised within the industry, and therefore should not be regarded as a weekly clean. Mr Law clearly confuses the two practices in his comment “with regard to real ale we clean our lines at the end of every barrel”.

Where practiced the water pull between casks is usually in the range of 2-4 pints per flush; relative to total cask volume this would not be evidential of buying out. It is standard practice for Brulines data advisors to overestimate line cleaning volumes in the favour of the licensee.

Mr Law also claims that there is a law on frequency of line cleaning. He is clearly confused as there is no law relating to frequency of line cleaning, however brewers and retailers have over the years established best practice for line cleaning regimes, including the recommended frequency.

Sadly too many licensees fail to clean their beer lines either frequently enough or to a robust enough regime which results in too many unsatisfactory pints being sold to the consumer. These licensees then wonder why their businesses are not performing.

Mr Law—My first experience of this was when my BDM reported a 54 x 11 gallon, barrels discrepancy to my previous employers at the Eagle

This example from July 2005 is a case of incorrect interpretation of the data by our Customer Data Advisor rather than system accuracy; it relates to missing delivery information for guest cask ales and the manual flushing between casks as covered above.

The tenanted pub companies provide a very wide portfolio of guest ales for their tenants. Historically this was occasionally problematic as direct supply by some cask providers took time to reconcile with deliveries from the various pub company supply chains however logistics systems are increasingly integrated enabling robust weekly delivery information.

Where the comparison data provided by Brulines is disputed the pub company and Brulines are careful to ensure that any area of dispute is investigated thoroughly to ensure the facts are correct (apart from our desire to be fair and transparent, if a dispute cannot be settled satisfactorily the data must be capable of standing up in court). In the dispute referred to by Mr Law the investigation was carried out and resulted in the appropriate corrective action being taken by Brulines and Enterprise, thereby demonstrating the fairness of the system. This is covered in the email dated 28 July 2005 as provided by Mr Law.

To minimise the risk of human error Brulines have implemented several quality assurance checks and processes over the past three years.

Mr Law—Unfortunately I personally know four Lessees that have been charged with the same accusation and sadly paid fines of £1.5k, £3k, £4K, £8K and another with an attempt at £18k

It is unreasonable to comment on this statement without further specific information being provided by Mr Law.

Overall the incidence of Brulines systems identifying licensees buying beer outside the tie and tampering with the system (bypassing and interfering) has continued rise over the past five years. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Mr Law—Nick Light Operations Director, Enterprise Inns told us that Brulines had gone to court 160 times and had a 100% track record. Mr Law is largely correct. In an email from Brulines to Nick Light timed 22.27 on 01 April 2008 the actual numbers for the period April 2005 to February 2008 were confirmed as: — Licensees admissions of buying out 10,949 — Licensees written undertaking not to buy out again 7,233 — Injunctions served 249 Since Brulines systems were first installed in the mid nineties we have never lost in court when the data has been challenged. The bottom line is that Brulines provide reliable operational transparency to draught beer operations in pubs. This transparency allows the pub companies to ensure that licensees are honouring agreements and also allows a factual basis for business development conversations and rent negotiations. The historical information is particularly helpful for new lessees ensuring that they have transparency on actual performance of the pub before entering into an agreement. Brulines system is a management information system which allows pub companies to manage their assets, and provides proactive licensees with valuable trading information for business improvement. This is why dispense monitoring is installed in 22,500 pubs.

Mr Law—Inclusion of the Publican article http://www.thepublican.com/storv.asp?storyCode%53272 Data integrity and transparency are sacrosanct for Brulines and to help ensure this we make significant investment in our systems, organisation and people. For example, our back oYce systems and Customer Data Analysts review the data on a weekly basis and on finding data anomalies will first check its integrity against historic trends, and where appropriate will commission line verifications and/or calibration checks, and possibly a field engineer visit to check for evidence of the licensee either tampering or bypassing flow meters. Malicious damage, tampering and bypassing of flow meters are common place due to many unscrupulous licensees who seek to defraud the pub companies and avoid taxes. In this particular case Phil Turner-Wright’s issue was not escalated by one of our Customer Data Analysts resulting in him escalating it direct through the Publican. Once the issue had been raised the appropriate action was taken to investigate and remedy the situation. In my statement at the time in October 2006, I said: “My investigations have highlighted a very basic internal communication failure which resulted in this situation being handled unsuccessfully by an employee. Had Mr. Turner-Wright’s issue been escalated through the proper channels more promptly this scenario would not have transpired”. Enterprise Inns provide their retailers with full time Customer Account Managers to investigate dispense irregularities in all of their outlets. The process allows licensees to challenge the data and seek clarification and corrective action where appropriate.

Mr Law—Recently we had new meters installed and the variance started to drop dramatically I am unable to comment on the installation of new flow meters as Mr Law does not make direct reference as to which outlet. “I am a Partner in two pubs leased from Enterprise Inns”.

Mr Law—The meters aren’t government stamped, are not recognised by Weights and Measures or Trading Standards This statement is a red herring. Flow meters used in the installation of Brulines dispense monitoring systems undergo an in-situ calibration process traceable to national standards. For any flow meter that is calibrated in-situ (as with all Brulines flow meters) the repeatability is the over- riding factor and the repeatability of Titan meters at constant flow is !0.25% (or better where a full pint is being measured). Already mentioned, Brulines have systems and processes which regularly review the integrity of calibrations, which is particularly necessary given the proliferation of licensees attempting to get round the dispense monitoring system. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Unlike spirits optics and grocers scales the Brulines flow meters are not installed to determine a unit for retailing where money exchanges hands between vendor and consumer. Our flow meters are used to reliably gather management data which is used for analysis and to identify trends. The trends are then investigated and may lead to issues being addressed with licensees including gaining admissions of buying out, fines being levied, and potential forfeiture of lease. Mr Law’s point relating to Weights and Measures has no validity as Weights and Measures legislation does not apply to the provision of data by Brulines because the services it provides arise out of a business to business transaction and do not impact on the product sold to the end user. In addition, Brulines has always believed that its equipment does not require to be stamped by Trading Standards. I hope this addresses the key elements of Mr Law’s submission, but should you require any further clarification please give me a call.

Eagle,Battersea (Mike Roberts—ETI Flowmetering Manager) Firstly, the flowmeters used are neither of the type available across the counter or that used in the oil industry, are not notoriously inaccurate and do not tend to need recalibration on a frequent basis. A paper on the technical nature of the meters is available if required. The meters do measure the flow of liquid as described, and the model used by Enterprise cannot distinguish between water and beer, which we have never claimed it can do. The dispense data is sent to Brulines for analysis and part of that analysis is indeed to attempt to remove dispense volume which might be water used during line cleaning. For keg products, which form the vast majority of dispense, this process is relatively straightforward because a meter is placed on the water ring main and volumes dispensed when water is being flushed through are removed. The set of circumstances referred to by Mr Law is restricted to cask products when cleaning is achieved by pulling water and/or line cleaning solution through the system directly from a container, generally a bucket. The removal of this volume is a more subjective process and is normally manifested by significantly large volumes being dispensed in short periods of time often outside of trading hours. It would be diYcult to accurately identify what was line cleaning if lines were cleaned after each cask within trading hours as described by Mr Law. Because of this potential inaccuracy, Brulines would not normally conclude that purchasing outside the tie had taken place on cask products without the Brulines CAM (who is trained in the interpretation of data) attending the site and discussing the reportage with the retailer. This discussion should encompass the line cleaning regime in that particular outlet and the reportage will be reviewed in the light of that. A major discrepancy was identified at the Eagle in the first half of 2005 and this was subsequently withdrawn on the basis that the cask line cleaning regime had not been taken into account and that deliveries by a former variant of the SIBA DDS scheme had not been accounted for. Since then there has been no reason to suspect anything untoward occurring at the Eagle because these factors have now been addressed. Brulines do supply data to retailers, either directly or via the web, and recently Simon Clarke at the Eagle complained that cask line-cleaning had not been removed correctly. As mentioned before this is a subjective process and a closer look at the data suggested that this might be right and the volumes were removed. It should be re-iterated that no accusation had been made on the strength of the data alone. Data continues to be sent to the Eagle and whilst no further issues have been raised, it has been suggested that some erratic line cleaning procedures are continually being introduced in order to deliberately complicate the interpretation process. 20 March 2009

Further Supplementary memorandum submitted by Enterprise Inns I am writing in response to your letter of 2 February 2009, specifically to address the two points you raised on behalf of the Chairman. With regard to the six submissions you forwarded on behalf of Enterprise (ETI) lessees, our assessments are being prepared and will be returned to you once complete. In relation to the answer given by Simon Townsend to Q218 by Julie Kirkbride, I can confirm that, in providing financial assistance to deserving licensees, such sums are not under any circumstances refunded to ETI. In demonstrating further how such financial assistance is provided, I am prepared to disclose to the Committee the following information, which is commercially sensitive and therefore strictly confidential. There are two mechanisms by which ETI provides temporary financial assistance: (i) discounts of *** per barrel oV invoice on all purchases of beers and ciders during the period of the financial support which is typically at least three months; and (ii) rent concessions (a temporary reduction in the monthly rent payable) for a predetermined period which is typically at least three months. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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At the time of writing this letter, 382 lessees are receiving additional discounts plus a rent concession, 219 lessees are receiving additional discounts only and 57 lessees are receiving rent concession only. In the majority of cases, we do require a temporary extension to the tie to include wines, spirits and minerals on the basis that this then provides ETI with even greater clarity on the trading performance and sales mix of each business during the period in which financial assistance is provided. In every case where a temporary extension to the tie is required, any additional cost incurred by the licensee is massively outweighed by the benefits of discounts received on beer and cider purchases and in rent concessions. If this were not the case, no licensee would take up the oVer of support and we would not insist on the full tie extension. At the time of our preliminary results announcement last November, we confirmed that in the twelve months to 30 September 2008 a total of 1,453 lessees had received temporary financial assistance in this way. As confirmed in our Interim Management Statement issued on 22 January,the current run-rate of additional and direct financial support being provided by ETI to its licensees is £1.4 million per month. Furthermore, we have recently announced a Price Freeze on a number of major draught beers until at least 4 July 2009, at a cost to ETI of £0.7 million per month. Based on the number of current stockists of these beers, 93% of ETI licensees will benefit from this Price Freeze activity which means that the purchase cost (excluding duty) of these beers to ETI licensees has not increased since February 2008. During the same period (ie since February 2008), duty has increased by a staggering 17%, with a further increase due to be applied this spring through the Chancellor’s duty-escalator. We remain hugely concerned at the detrimental impact that such poorly targeted and ill-conceived measures continue to have on pubs and pub-going. In relation to the answer given by Simon Townsend to Q270 by Michael Clapham, I can confirm that ETI only obtains access to a lessee’s profit and loss account if the lessee chooses to share such information with ETI. This can occur at any time if the lessee so desires, and is particularly helpful in providing supportive evidence during a rent review negotiation. There are certain circumstances under which such disclosure is obtained by ETI as a mandatory pre- condition. These are: (i) the provision of temporary financial assistance referred to above; and (ii) an out-of-cycle rent review requested under ETI’s Code of Practice. In both cases, we require full disclosure of recent trading accounts (last two years if available), stock results and VAT returns aswell as evidence of current overhead costs being incurred. The basis for this pre-condition is that we need to have a full understanding of the complete trading position of a business in order to determine what actions are appropriate. As a consequence of reviewing this information we are, in many cases, able to advise licensees on how to reduce costs or improve eYciencies and stock yields leading to a material improvement in their financial position and a long-term enhancement in the financial controls being applied. In some cases, such a review may conclude that all appropriate measures are being taken by the lessee and that temporary financial support or a long-term reduction in rent through a Code of Practice review is the correct action for ETI to take. Surprisingly, there are many occasions on which we have been asked to provide financial assistance, or consider a Code of Practice rent review, only to have our request for disclosure rejected by the licensee. This may indicate unwillingness, on the part of the licensee, to disclose the true profitability of their business. Alternatively, it may indicate a fundamental lack of financial controls necessary to run a business. In the new ETI Retail Partnership Tenancy agreement launched in the latter part of 2008, it is a mandatory condition that licensees employ the services of a qualified trade accountant and provide full disclosure of profit and loss accounts to ETI on at least a quarterly basis. I made reference in my letter of 1 February to the process of assignment of a lease between outgoing assignor and incoming assignee. On such an occasion, we expect an incoming assignee to take full responsibility for the extent of their due diligence prior to purchasing the lease from the assignor, and require evidence that less experienced licensees have taken independent legal and financial advice before we will give our consent for the assignment to proceed. I hope that I have provided the confirmation and clarity that is sought. Should you have any further queries or require clarification on any matter, please do not hesitate to contact me. 12 February 2009 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by Mark Charman 1. I have been involved in the licensed trade since 1996, prior to which I had extensive experience in the pub, hotel and food business and gained qualifications in hotel and catering management. 2. Between 1996 and 2006 I ran over a hundred tied houses on a variety of diVerent lease and tenancy arrangements, mainly with Marston’s, which became Wolverhampton and Dudley Brewery and is now renamed Marston’s. 3. My business completely collapsed in 2006 at which time all of the houses I was running were Marston’s tenancies or leases. The collapse of my business was principally due to a lack of margin despite all the pubs in my estate trading above expectation some by 1.5 times FMV. 4. The lack of available margin was well documented within my business. I tried on numerous occasions to discuss this with Marston’s. Although some within Marston’s understood the problem and took it seriously, senior management were not prepared to discuss the issue and flatly refused to look at my accounting information. 5. Marstons used an extensive spreadsheet to calculate rent and a tenants potential profitability. Because of the relationship I had with a number of BDM’s I was often given copies of these spreadsheets, although after the last parliamentary inquiry Marston’s refused to make rent and profit calculations available to anyone. I discovered a number of errors with the spreadsheet model, which left the model heavily weighted towards Marstons. I discovered a further problem in relation to the updating of wholesale prices within the model in 2005. 6. The net result of these omissions and errors within the Marstons business model by my calculations meant that the average Marstons tenant trading at Marstons average volume with average costs were at best only able to break even. Obviously leaving no money for the tenant to live. These calculations were checked by two Marstons employees in 2004. Both of whom agreed with my calculations and undertook studies of their own to try to further understand the issues that I had raised. These individuals informed me separately that they took their findings to senior management who were unwilling to discuss the matter. 7. From the evidence I have I believe senior management at Marstons were fully aware of the true situation regarding their tenanted model and the actual profit their tenants were really able to achieve. However, due to commercial pressures and the motivation from a highly geared employee bonus scheme, senior management, including directors at Marstons failed to act. Their lack of action has left many thousands of tenants in an appalling situation and in the long term has cost the public purse and Marstons shareholders dearly. 8. In my confidential submission to the 2004 inquiry I questioned the evidence given by a Marstons representative when they stated that their average tenant earns £27k per annum. Because at the time I was running over 2% of Marstons estate and as an overall group of pubs which represented an above average sample of their estate, I know that Marstons claims were wholly inaccurate. 9. Unlike many tenants and lessees I had accurate and up to date accounting information available to me. With there seemingly no prospect of my business being able to cope with constant rent and wholesale price increases as well as an increase in overall operating costs, I made a sensible and practical decision to exit the business leaving no debt. To facilitate this move Marstons would have had to release me from all my leases and tenancy agreements, which they were not prepared to do. In fact I was told by the most senior person I had access to at Marstons, I had to stay in my pubs until I was bankrupt. 10. I believe that if you undertake simple calculations and look at the published profit per house figure that all the major pub companies quote in their accounts, you will soon understand how it is nigh on impossible for a tenant or lessee on a tied agreement to make money. I am of course more than willing to help supply any information I can for you to undertake this exercise. 11. I believe the model used by all the major pub companies in tied agreements is flawed and because it is allowed to continue, it makes the pub companies dominant and overbearing in the marketplace. As a result tenants and the wider economy suVer. 12. I am concerned that tenants have in the past not been given a fair hearing and because of the pub companies dominance, the real truth of running a pub on a tied lease or tenancy has not fully come to light. Although one or two action groups have formed in the past couple of years with the sole purpose of highlighting the plight of tenants, these organisations have very little funds and are not able to compete with sophisticated marketing eVorts that all the large pub companies have available to them. 13. During my time in the tenanted pub business my team of managers and I worked incredibly hard to make a success of our businesses. Our landlords greeted every success with a further opportunity for them to capitalise on the good work that we had achieved. I would like to stress that my team and I were exceptionally good at making pubs run properly, often taking pubs which had had a troubled past and turning them into thriving enterprises. I now believe that with the physical evidence I have and from talking to formed employees of Marstons that my fate was sealed from the time that I signed any agreement. There is simply not enough available profit from the average pub to facilitate a reasonable wage for the lessee and the demands of the pub company and shareholders. Again, it is the permitting of the tied model which allows Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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this situation to continue. Without it, the market would find its own level for rent and wholesale prices and the trade would become far more equitable for all those to seek to earn a living from it. I urge the committee to take my comments seriously and once again wish to oVer any help and assistance that I can. September 2008

Memorandum submitted by The (CAMRA)

1. Introduction 1.1 CAMRA, The Campaign for Real Ale is a consumer organisation that seeks to promote real ale, well run pubs and the interests of consumers. CAMRA has over 95,000 individual members and is wholly independent from the brewing and pub industry. 1.2 CAMRA believes that competition law needs to be more rigorously enforced in the beer and pub market to ensure that the consumer benefits from greater choice and improved value for money when visiting the pub. Market dominance of the pub companies through the beer tie has resulted in: — a substantial section of the UK’s pub market being foreclosed to the products of small and medium sized brewers; — the closure of valued community pubs made unviable by high rents and beer prices—figures for the first half of 2008 reveal that closures have accelerated to 36 pubs a week;5 and — the price of beer sold in pubs increasing at above the rate of inflation.

2. The UK Pub Market 2.1 The three biggest pub companies tie just over 30% of the UK’s pubs.

Pub Company 2008 Number of Pubs Enterprise Inns 7,756 Punch Taverns 7,575 (excluding managed pubs) Admiral Taverns 2,400 Total 17,731 Total UK Pubs 57,000

2.2 In addition to pubs tied by the largest three pub companies a further 6,700 pubs are tied by brewers and a further 5,869 pubs tied by smaller pub companies. In total therefore about 30,300 pubs in the UK are tied, which is just over 53% of the total UK pub stock of 57,000.

3. A Guest Beer Right 3.1 The “beer tie” is an exclusive purchasing obligation which forces pub lessees and tenants to buy beer and other products from a nominated supplier(s) at prices substantially higher than those available in the free market. This practice means higher pub beer prices for consumers and reduced consumer choice. 3.2 The introduction of Small Breweries’ Relief6 in 2002, growing consumer preference for local products and the enthusiasm and the commitment of dozens of entrepreneurs has seen a huge increase in the number of UK small brewers. There are now over 660 independent brewers in the UK compared to just over 440 in 2002.7 3.3 Despite the growth in the number of small brewers the pub market is substantially foreclosed to them because they are unable to supply the minimum volumes, discounts and logistics demanded by large wholesale and pub owning companies. 3.4 The Society of Independent Brewers’ Direct Delivery Scheme (DDS) has had some success in enabling local brewers to deliver direct to pub company pubs. The growth of this scheme however is hampered by the margin demanded by pub companies, which reduces the profitability of small brewers and means that the prices charged to consumers for these beers can be comparatively high. 3.5 Both small and regional brewers lack the negotiating power and economies of scale enjoyed by the Global Brewers. A guest beer right that would apply to all companies with more than 500 tied pubs would resolve these problems by allowing small and regional brewers to deal direct with local lessees.

5 British Beer and Pub Association—Press release—Pub closure rate accelerates to five a day—08/09/08 6 Small Breweries Relief means small brewers benefit a reduction in excise duty of up to 50%. 7 Totals taken from CAMRA’s 2004 and 2009. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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3.6 The 2004 DTI Select Committee report concurred with the view that introducing a guest beer right “of a particular type, for example cask ales and regional or national specialities, would run contrary to EU competition law and could lead to the UK Government being challenged in the European Courts.” CAMRA disagrees with this view for the following reasons: — as the function of a guest beer law would be to remove barriers to market access not impose them there could be no conflict with competition laws; and — a guest beer right would be open to brewers regardless of location. Cask conditioned beers are brewed worldwide by smaller producers. 3.7 While a guest beer right for cask conditioned beers is CAMRA’s preferred option consideration could be given to another type of guest beer law that would avoid any perceived complications with EU competition law. A guest beer could be defined as a beer brewed by a brewer anywhere in the world with an annual production below 200,000 hectolitres. This reflects the maximum production limit allowed through the EU’s small breweries relief scheme. 3.8 A guest beer right would be a simple and straightforward measure which would address the problem of the UK pub market being substantially foreclosed to small and medium sized brewers. Introducing a guest beer right would be popular among regular pub goers and pub lesees as well as being in the long term interests of pub companies by supporting the long term viability of their pubs.

4. Pub Beer Prices 4.1 The current pub company model depends on money generated from the rent charged to lessees, sometimes referred to as a dry rent, and money generated from profit the pub company makes from supplying beer, sometimes referred to as wet rent. Enterprise Inns generate 47% of their total profits from beer sales and 47% from pub rents.8 Punch Taverns generate 47% of their total profits from beer sales and 43% from pub rents.9 Their remaining profits are generated from machine income and other drink sales. 4.2 Morgan Stanley estimates that a lessee may typically be charged a wholesale price of £1.10 per pint of lager, compared to 80p charged to a free trader and 60p to licensee of a managed pub.10 These price diVerences mean that pub lessees struggle to compete on price with both managed and free trade public houses, which is contrary to fair competition and detrimental to the interests of consumers. 4.3 The UK real ale market is highly competitive and as a result free of tie licensees are able to benefit from large discounts. During August this year real ales from Brakspears, Greene King, Highgate, Batemans and Wadworths were available via a nationwide wholesaler for between 63p and 72p a pint.11 In contrast one of the very cheapest real ales available to a Punch lessee during August was priced at 96p a pint.12 Assuming a gross profit target of 50%, a beer purchased by a licensee at 72p a pint would need to be sold for £1.69, whereas a beer purchased at 96p would need to be sold for £2.25 a pint. 4.4 The price of beer in pubs has increased faster than brewery beer prices over the last 10 years. Between April 1998 and April 2008 the UK producer price index (including excise duty rises) for beer increased by 31.8%,13 whereas the retail price index for beer on sales increased by 39.4%. This trend indicates a lack of competition and further investigation is required to establish the degree to which the existence of the beer tie is inflating the cost of beer in pubs by restricting competition on beer prices. 4.5 The Interim Results Presentation 2008 for Enterprise Inns show that they make a 50% gross margin (excluding discounts) on the beer and cider that they supply to their lessees. Punch Taverns 2007 Preliminary Results Presentation 2007 shows that they make a 52% gross margin on the beer and cider that they supply to their lessees. This level of gross margin appears excessive when compared to the 25% gross margin made by Enterprise on wines, minerals and spirits for which the majority of lessees are not tied. 4.6 There are few restraints to prevent pub companies earning excessive profits from the sale of tied products, primarily beer and cider. If lessees buy outside of the tie they are liable to a substantial fine, losing their jobs and being evicted from their homes. Lessees are able to challenge rent increases but they are unable to challenge increases in the cost of tied products. 4.7 A column by pub operator, Peter Linacre, in the Morning Advertiser Trade Newspaper claims that it is the pub companies not lessees who have benefited from the increased gap between the price that Brewers sell beer and the price which the consumer ultimately pays in the pub. According to Peter Linacre at the start of the pub company leasehold model the average discount received by pub companies was £120 per barrel, which was shared equally between lessee and pub company with £20 going in other costs. This compares unfavourably to the current situation where a pub company can achieve a discount of £230 per barrel of which they retain £160, £20 goes in other costs and the lessee still receives only £50.14

8 Interim Results Presentation 2008—Enterprise Inn. 9 Preliminary Results Presentation 2007—Punch Taverns. 10 Morgan Stanley Research—Leisure and Hotels, Leased Pubcos: Avoid—September 2008. 11 Available during August through WaverleyTBS who have a UK wide distribution network. 12 Figure taken from Punch Taverns’ price list dated 7 July 2008. 13 British Beer and Pub Association—Statistical Handbook 2008. 14 Peter Linacre—Demand down, price up—please explain. Morning Advertiser—18 September 2008. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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4.8 CAMRA believes that a mechanism needs to be established to ensure that beer price rises in long- term pub company lease agreements are proportionate to the increases in the producer price index for beer. It is both unjust and damaging that a pub company can increase beer prices without eVective restraint. The large margin that pub companies achieve on beer sales is not adequately counterbalanced by benefits provided to lessees in terms of investment, business support or rental concessions. 4.9 CAMRA urges this committee to request a study by the OYce of Fair Trading to clearly establish whether the existence of the “beer tie” has led to tied lessees being worse oV than they would be in the absence of the beer tie. If necessary, the OFT should then take action to regulate the price that pub companies can charge lessees for tied products.

5. Pub Rents 5.1 The introduction of the new British Beer and Pub Association’s Codes of Practice Framework in addition to new company Codes of Practice is a welcome result of the 2004 Trade and Industry Select Committee Report. These codes however have not led to an end to lessees faced with rents at an unsustainable level. 5.2 According to a report from Morgan Stanley pub rents have increased faster than pub sales and faster than inflation. An analysis of rent per barrel sold shows a 11% increase per year at Enterprise Inns and a 4% increase per year at Punch Taverns since 2002.15 This level of increase is considerably higher than rents achieved in the wider commercial sector. Falling beer sales and a shift to consumption of beer at home are two reasons why pub rents should be falling not increasing. The Morgan Stanley report concludes that 20%—30% of tied pubs could be uneconomic due to high rents. 5.3 Rent is generally calculated by deducting overheads and the proposed new rent from the level of trade that a hypothetical competent licensee could be expected to achieve and dividing the remainder equally between lessee and the pub company. The current rent calculation however takes no account of the revenue lost to lessees as a result of being unable to buy beer in the free market. One option to ensure the “beer tie” is fair and not anti competitive would be to reduce pub rents to take into account the higher beer prices that lessees are forced to pay. 5.4 The existence of upward only rent reviews and annual rpi increases regardless of worsening trading conditions can lead to pubs becoming unviable regardless of the merits of the lessee and the potential of the pub. Upward only rent clauses should be made unlawful and annual rpi rent increase should not apply where lessees have suVered a fall in trade as a result of external factors. Given the closure of 36 pubs a week these changes need to be made urgently. 5.5 CAMRA urges the committee to recommend: — an end to upward only rent agreements; and — an end to annual rpi rent increase regardless of trading conditions experienced by lessees.

6. Pub Disposals 6.1 A pub company will often choose to dispose of a struggling pub rather than work in partnership with a lessee to improve the business fortunes. Where a pub company chooses to go down this route the lessee should be given first refusal to buy the pub. At the moment it is possible for a pub to be sold without the knowledge of the existing lessee. 6.2 A particularly deplorable practice is the use of restrictive covenants to prevent future purchasers from continuing to use the premises as a pub. The result of this is to restrict competition and to strengthen the market dominance of an individual company in a locality. The use of restrictive covenants should therefore be outlawed. 6.3 The ease with which pub companies are able to dispose of struggling pubs, usually for alternative development, reduces the financial incentive they have to work with a lessee to turn around a struggling pub.

7. Retention of the Beer Tie 7.1 CAMRA supports the retention of the beer tie and opposes eVorts to secure its abolition. If operated on a fair basis the “beer tie” is in the interests of both lessees and consumers. 7.2 The four largest global brewers operating in the UK brew nearly 8 in 10 pints sold in the UK. 7.3 The abolition of the “beer tie” could result in substantially strengthening the market power of these four global brewers to the detriment of market access for small and medium sized brewers and consequently consumer choice.

15 Morgan Stanley Research—Leisure and Hotels, Leased Pubcos: Avoid—September 2008. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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7.4 In summary the beer tie is important in: — providing a low cost entry into pub ownership; — ensuring the survival of the medium sized family brewers; — ensuring that the financial loss associated with any fall in beer sales is shared by the pub company; and — preventing domination of the UK pub market by the four global brewers.

8. Conclusions and Recommendations

8.1 CAMRA supports the retention of the beer tie but believes action is necessary to ensure that the tie acts in the best interests of consumers. 8.2 The consumer has been faced with above inflation increases in the price of beer sold in pubs partly as a result of pub companies earning a large margin on their beer sales. The consumer has also lost out on greater consumer choice as the beer tie restricts the choice of products available to lessees. 8.3 CAMRA recommends the following: — The introduction of a guest beer right to address the foreclosure of the pub market to smaller brewers and lack of consumer choice. — That the the OYce of Fair Trading conducts a study to clearly establish whether the existence of the “beer tie” has led to tied lessees being worse oV than they would be in the absence of the beer tie. If necessary, action should then be taken to ensure lessees and consumers are no longer disadvantaged. — That where a pub company chooses to sell a pub they must first oVer it for sale to the existing lessee. — That it should be unlawful for a pub to be sold with a restrictive covenant in place preventing any purchaser from continuing to run the pub. — An end to upward only rent agreements. — An end to annual rpi rent increase regardless of trading conditions experienced by lessees. 29 September 2008

Memorandum submitted by Herefordshire & Worcestershire CAMRA

Pubco Inquiry—Restrictive Covenants

I would like to bring to your attention the use of restrictive covenants to prevent purchasers reopening a closed pub that has been sold to them by one of the pub companies. The Morgan Inn in Malvern is due to be sold at auction. I have attached the sales particulars (not printed here) from the selling agents, Breach Ingram. I would like to draw attention to the following condition of sale: “The premises are being sold with a restrictive covenant preventing the property from being used as a public house, restaurant or hotel or for any use involving the sale or supply of intoxicating liquor.” The use of restrictive covenants such as the above result in: — the unnecessary loss of community amenity and employment opportunities; — local plan policies aimed at protecting pubs being bypassed; and — the frustration of individuals and small and medium sized brewers who wish to purchase a free of tie operation. In many cases pubs that are not viable under the leasehold model can become viable when operated as free of tie or freehold operations. The use of restrictive covenants contributes to a shortage in the number of freehold or free of tie pubs on the market, a shortage which may mean that aspiring pub operators feel compelled to opt for a leased pub. CAMRA would urge the Committee to recommend that the use of restrictive covenants by pub companies is prohibited. 4 December 2008 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by Admiral Taverns

1. Background to Admiral Taverns 1.1 Admiral Taverns was formed in December 2003 and currently operates over 2,200 pubs across England and Wales. The business has grown primarily through the acquisition of pubs from other companies in the sector and only operates leased and tenanted pubs. Although the business has only been trading for four years, the management team have been recruited from a wide range of other pub companies and has a huge experience in the leased and tenanted sector. 1.2 Admiral’s income derives from three primary sources: — the rent received from tenants and lessees; and — margin generated on the sale of drinks to licensees; and — share of the machine income. 1.3 Admiral oVers licensees a full range of flexible agreements from short term tenancies to long term leases. This range of agreements oVers the licensee diVerent low-cost options to start up in business. Part of Admiral’s strategy is to oVer the widest range of agreements and to be flexible with certain elements of the agreements to ensure that it is properly suited to the licensee and the style of property. 1.4 Admiral oVers a wide range of additional services to its licensees including business support, licensing management, capital investment, marketing and promotional support, food development and property services.

2. Assistance to Licensees in Current Market Conditions 2.1 The key underlying principle of the leased and tenanted pub sector is that both the licensee and pub company want the business to succeed. Growth of the business profitability will generally lead to more income to both parties. However, where trade does decline both parties will share some of the pain and look to minimise this impact. 2.2 This principle is particularly important during the current economic climate. There is little doubt that some pubs are being negatively impacted by the current trading conditions but the pub company is able to buVer the licensee from the full impact of the reduction in trade. This would not be the case if the properties were being leased from a standard property owner. It is noted that Admiral leases a number of sites from commercial landlords and there is no prospect of it receiving any support or rent reductions over this period. 2.3 Although Admiral has seen many businesses continue to develop and increase trade, Admiral recognises that the trading conditions for the pub sector are very tough at the current time, with a reduction in trade for some licensees from the smoking ban, increased competition from supermarkets selling alcohol at below cost, increased operating costs and additional compliance costs with legislation. 2.4 Admiral is therefore continuing to provide additional support for its licensees to maintain their businesses even though this support is not required under the lease or tenancy agreement. This type of support has always been provided to licensees who were struggling to maintain their income but the level of support through rent concessions and additional oV-invoice discount schemes has now increased to over £2.5 million per annum across over 250 licensees. Additionally across the estate, the company has provided support through capital investment, additional marketing and promotional support and maintaining existing insurance recharges across the whole estate despite increases in premiums in the property market, and to our business, from the 2007 floods. 2.5 Further to the above support, Admiral has confirmed that it will absorb, in the short term, the exceptional price increases announced by a number of brewers over the last couple of months and will not be increasing these prices to licensees for the balance of 2008. Admiral has also been trialling discount schemes which provide exceptional prices to licensees without any amendments to the terms of the agreement or rent levels. These discounts allow the licensee to earn significant discounts over and above their existing discount scheme for achieving target volumes or pass the majority of the margin on certain products to the licensee.

3. Code of Conduct 3.1 Following the Trade and Industry Select Committee (“TISC”) review of 2004, one of the major recommendations was for British Beer and Pub Association (“BBPA”) Code of Conduct issued in 1997 to be updated and that the industry should accept and comply with this code. 3.2 The Committee will be aware that the BBPA has updated the code and the industry has followed this with updated individual company codes. Admiral has also compiled its own Code of Practice, incorporating the standards set out by the BBPA but also going further than the BBPA code in a number of areas. Noted below are some of the specific areas recommended for inclusion by TISC and how they are covered by Admiral’s Code of Practice. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Rent reviews and rent setting 3.3 Although the Admiral estate has a lower proportion of long term leases than some other pub companies, the rent review is considered to be a pivotal part of the relationship with the licensees. 3.4 The aim of the rent review is to ensure that the new rent agreed is fair and equitable for the property. It is a fundamental part of setting the rent that the licensee is able to make a reasonable income from their business. 3.5 However, Admiral does not wait for the rent review date to reduce rents to fair and sustainable levels. Where a public house trading potential (and therefore the income of the licensee) has been aVected, we will look to support that licensee through a package of measures as set out above. 3.6 Admiral’s average annual rent charged to licensees is about £15,000, well below the average of other pub companies. This lower level does reflect the lower trading potential from the properties but also reflects the opportunity being given to licensees to earn a reasonable income from the property. 3.7 Admiral uses the “profits method” in assessing rents for each site, a standard method used across the industry. This involves assessing the fair maintainable trade and operating costs that would be achieved by a hypothetical competent operator and then calculating a rent based upon this divisible balance. The percentage of the divisible balance calculated as rent is worked out on a site by site basis but generally ranges from 35% to 55% depending upon the individual circumstances of the operation and comparable evidence for other nearby operations. 3.8 Over the four years since Admiral began trading, there have been less than 200 rent reviews and only two of these have been referred to an outside party to set the rent. On both occasions, the rent was agreed by mutual consent prior to the independent expert completing their assessment. 3.9 The company also looks to work in an open manner with licensees and will share its profit and loss assessment. Admiral also encourages the licensee to share their actual trading as this will assist in setting a fair and sustainable rent for the site. 3.10 Admiral always recommends that licensees take independent advice prior to agreeing the level of rent and where possible will try and reduce the costs of the review process. A number of the agreements within the Admiral business require an independent arbiter to be appointed where the rent cannot be agreed. The cost of this process can be very expensive (over £10,000) and therefore it is recognised that this can deter some licensees from using this to finalise the rent. Admiral has stated that it will waive this provision within all of its agreements and allow the licensee to choose that the rent be set by an independent expert, a process which will be significantly less expensive. Admiral also understands that the British Institute of Innkeeping (“BII”) is looking to set up an independent expert referral service, which will help to speed up and further reduce the costs of the rent review and we welcome this initiative. 3.11 Given the importance of the rent review process, Admiral is currently working with the BII to present in detail the rent review process to licensees from within and outside its estate. 3.12 As stated in its Code of Practice, Admiral will use the above approach on all rent reviews. This means that despite the actual wording of the lease agreement, Admiral will waive any ‘upward only’ clauses on future rent reviews and will set the rent to the correct, fair sustainable rent. This could result in the rent being assessed at a level below the initial rent for the site.

Role of the Business Development Manager (“BDM”) 3.13 The BDM is the main point of contact and the key relationship with the licensee. As such Admiral recognises that this is an essential role in the development of our and our licensees’ income. 3.14 A number of our BDMs have been licensees previously and therefore have an in depth knowledge of the required skills and support required by licensees. Admiral has deliberately kept the ratio of pubs to BDMs below the industry norm, with an average of 40 pubs per BDM. Admiral believes that this enables the BDM to better understand the specific pub operation and oVer the best support to the licensee. 3.15 Admiral maintains the knowledge and business skills of the BDMs through a continuous programme of training including food development, marketing skills, product awareness and knowledge, briefings on new legislation and general finance understanding.

Complaint and dispute procedure 3.16 Complaints and disputes are treated extremely seriously within the business. It does represent a potential breakdown in the relationship between the BDM and the licensee. The complaints handling process is fully set out in our Code of Practice and all complaints received at head oYce are monitored to ensure that they are fully responded to. The process includes the ability to escalate the dispute to the Managing Director. 3.17 If the Managing Director is unable to resolve the dispute, an independent adjudicator will be involved to resolve the matter. The Admiral website also includes links to a number of trade bodies who will be able to assist licensees if they wish to use independent support during this process. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Disclosure and availability of information 3.18 It is an important part of the relationship between a licensee and pub company that both parties understand their expectations from the property before entering a long term agreement. Admiral will therefore share prior trading experience from the property and expected levels of trade. Admiral also expects the licensee to share their business plan to ensure that there is no misunderstanding with regard to the future operation. 3.19 Admiral has generally favoured allowing licensees to take a six month agreement when they first take on a new property. This allows the licensee to understand the business and confirm that the potential from the property is in line with their expectations. Where the property does not meet the licensee’s expectations, it allows the licensee to leave the business without having incurred additional costs and financing required when entering a long term agreement including stamp duty, legal fees and fixtures and fittings purchase.

Legal and professional support 3.20 Importance is given within the company to the need for all new and existing licensees entering new agreements to take independent advice. This is emphasised in the Code of Practice and is also set out to licensees in all relevant documentation prior to a new agreement being signed. This is further emphasised by our BDMs in meetings with potential licensees. Admiral has recently introduced a requirement for any new licensees to take professional advice prior to entering a new agreement or specifically confirming that they have considered this option and do not wish to take independent advice.

4. Trade and Industry Select Committee Inquiry 2004 Conclusions

No one pub company is dominant 4.1 The TISC enquiry concluded that there was no one pub company which had a dominant position in the wholesale market for beer. Given that this assessment was on the basis that the largest pub company had 8,739 pubs in 2004 and the largest pub company currently has only 8,400 pubs, Admiral believes that this conclusion must continue to be the valid. The percentage held by one company would be further reduced if the market was considered larger than just full on-licences.

More flexibility in choice of products 4.2 The TISC recommended that pub companies allow their tenants flexibility on the choice of products. This has been a fundamental policy of Admiral which sources its beers from the open market and has no exclusive purchasing arrangements. No brewer is excluded from the estate as long as they are able to demonstrate certain quality standards and suYcient demand. 4.3 In addition, the Direct Delivery Scheme operated by the Society of Independent Brewers reduces the barriers to entry for local beers from smaller brewers and enables these products to be made available to tenants, giving them an unprecedented range of products. 4.4 In a small number of exceptional and site specific circumstances, Admiral has released licensees from the beer tie in return for an increased rent. Admiral has noticed that the majority of these sites have entered exclusive agreements with one brewer to source only beers from their product range, eliminating the ability for other brewers to supply the site or local brewers to compete.

Removal of the tie would not benefit licensees 4.5 The TISC inquiry concluded that licensees would not be better oV with the removal of the beer tie and this would likely benefit the international brewers. Despite changes in ownership of some of the brewers, Admiral strongly believes that this conclusion is still correct. Admiral would also need to review all rents to compensate for the loss of wholesale margin and the relationship with existing and future licensees would change with less importance being placed on tenant’s businesses and any downturn in trade would be borne exclusively by the tenant.

More transparency about contractual relationships with nominated AWP suppliers 4.6 Admiral is convinced that through proper management and control of the machines within its sites, the total income generated from machines is significantly enhanced. To achieve this, Admiral employ a dedicated machine management team to ensure that specialist advice is available to licensees, a wide selection of machines are oVered and the best machines are available across the business. This ensures that our licensees receive an excellent service with minimal down time, machines are properly positioned providing the optimum oVering to a wider audience and therefore increase footfall and profitability. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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4.7 Admiral has 26 nominated suppliers in its estate for licensees to choose from. These suppliers have met strict selection criteria and deliver high quality service to our licensees. By using these suppliers, Admiral ensures that its machines are operated legally, with permits and licences obtained, are insured and no lengthy contracts need to be signed by licensees. 4.8 Admiral asks all licensees to enter a separate agreement with regard to the machines in their sites which specifies that only approved and nominated AWP suppliers may supply machines to each site. The share arrangements are clearly set out in this agreement. 4.9 Although this machine income is shared between the licensee and Admiral, this share arrangement is included in the assessment of the rent through the rent calculation and rents are therefore reduced by an element of the machine income.

5. Licensing Act 2003

Increased costs 5.1 The Licensing Act 2003 (“Act”) has significantly increased the cost and resources required for the administration of the pub licences. 5.2 This began with the requirements for plans and additional information which resulted in pub companies being required to bring in external support to assist in a process that in many cases simply secured grandfather rights for its licensees in respect of existing trading hours with no added benefit. 5.3 This is further increased by the costs involved in annual renewals and the costs involved in changes to designated premises supervisors.

Additional hours of trading 5.4 The Act has enabled pubs to open longer and to compete with other elements of the leisure market. The majority of these additional hours have been on Friday and Saturday where Admiral has seen an average increase of one to two hours. 5.5 Admiral has not seen the well publicised 24 hour drinking across its estate or across the public house market. One Admiral property has been granted a 24-hour licence. However, in this case and in the majority of the other pubs with a 24 hour licence, these additional permitted hours are not being used. 5.6 These additional hours have resulted in certain public houses being able to retain their customers longer rather than lose them to town centre sites which historically had longer opening hours. 5.7 However, evidence is available to demonstrate that since the longer opening hours started, customers have used this to drink more at home until later (preloading) before visiting the pub.

Reduced trading potential 5.8 The Act has given more scope for local authorities to impose trading restrictions on premises. Although Admiral recognises that this is a positive measure in many ways to ensure that premises maintain the appropriate disciplines at site, there has been a significant increase in restrictions imposed on the use of outside areas. Following the smoking ban, there has been an increase in the importance of these areas to maintain trade against stiV competition from the oV-trade and restrictions on their use has limited this ability to compete in more community based sites.

6. Need for Further Regulation of the Industry 6.1 Admiral does not believe that there is a need for additional regulation within the leased and tenanted pub industry. The conclusions of the TISC enquiry in 2004 are still valid in the current market and the recommendations have been generally adopted by the industry. 6.2 Given the relationship between a pub company and licensee, the pub companies have responded to poorer trading conditions with a significant package of support which they are not contracted to provide under their agreements. This support is not being seen within the commercial property market or other landlord/tenant relationships and therefore changes to the current arrangements could lead to a less flexible approach from the pub companies, higher rents and additional pressures on licensees. 29 September 2008 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by Sarah Ferdinand 1. I am a solicitor and the senior partner in Ferdinand Kelly,an independent firm of commercial solicitors which has specialist knowledge of the pub industry. 2. We have frequently been instructed to act for publicans in their purchases as tenants of pub leases, and in related matters such as rent reviews and lease renewals of public houses. 3. I can therefore say that I am familiar with issues currently before this Committee. 4. The purpose of this letter is to draw the Committee’s attention to some facts, which are relevant to the Trade and Industry Select Committee (TISC) recommendation of 2004 to the eVect that pub leases should not contain upwards only rent reviews. 5. I was involved in a transaction earlier this year, acting for the purchaser of a 15 year lease from the freeholder of a public house in Devon. The following are the particular relevant matters: (a) The vendor landlord was a private individual, not a pubco or a brewery.But the solicitor instructed by him told me that she dealt with public house leases as a specialism, and that her cases covered a wide area in the Southwest of England. (b) She prepared the draft 15 year lease. This contained an upwards only rent review clause and also a clause providing for annual rent increases in line with the retail price index (“the Upward Rent Review Terms”). (c) I tried to persuade her to remove these provisions. I pointed out to her the TISC recommendation of 2004. (d) However, she and her client were both quite firm in their refusal to depart from their Upward Rent Review Terms. (e) The solicitor based her firm refusal on the many examples of pub leases with which she said she dealt with currently. These included leases prepared by pubcos such as Punch Taverns and Enterprise Inns. She said that all drafts she had seen contained terms identical to those she was insisting on in the Upward Rent Review Terms. As far as she was concerned, such terms were the current industry standard. 6. In short, it was clear to me from the above experience that in Devon and surrounding parts of the Southwest the Industry was not behaving in accordance with the TISC recommendations, but was continuing to sign tenants up to leases containing upwards only rent review provisions and clauses providing for annual rent increases in line with the Retail Price Index. 7. I am happy to assist the Committee as they think fit, with further detail on the above. 29 September 2008

Memorandum submitted by The Duke Public House

RE: Punch Taverns (100’sorMore Different Named Companies—Dormant and Active Called Punch or Similar Named Companies)

1. Legal Battle Five years ago, I bought the “The Duke” public house, which had 14 years remaining on its lease. The original agreement was with Inns Business Properties Ltd. However, Inn Business Properties Ltd. were not the registered leaseholder when they granted a new 15 year Lease to the previous owner on 27 June 2002. Inn Business Properties Ltd had in fact already transferred all of its assets on 20 August 2000 to the Punch Pub Company (IB) Limited (having previously changed its name from Inn Business Group Ltd on 18 August 2000). On 23 October 2000 Punch Pub Company (IB) Limited sold all its assets (at a reduced valuation) to Punch Pub Company (PTL) Limited (having also previously changed its name on 18 August 2000 from Punch Tavern Ltd). Punch Pub Company PTL Limited then changed its name on 2 September 2004 to Punch Taverns (PTL) Limited. Inn Business Properties Limited (ie who purported to be the leaseholders of the Duke granted a Lease to the previous owner on 27 June 2002) and Punch Pub Company (IB) Limited have been dormant companies since 2000; both have not traded and both have no assets, as confirmed in their trading accounts. In 2004 I had a long legal battle with Punch which included the validity of the lease; I lost this at a cost of nearly £70,000.00. Included in the £70,000 were Punch’s costs which came to the sum of £37,898.60. This had to be paid within 14 days or Punch would have achieved their ultimate goal which is to remove me from the Duke and ruin me financially. For the record, during the first hearing on 16 September 2005 at Leeds Magistrate Court, Punch informed the court that the damages suVered by Punch were no more than £600 (six hundred pounds). Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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From the first day of purchasing my pub, Punch’s behaviour and conduct has been overbearing and high handed including in the way in which Punch has sought to interpret and operate the lease unfairly against me, this is despite reassurances from their solicitors “in writing” that in 2004 that this would not happen. This all started when Punch imposed a Rate Valuation Service in 2004 and 2005. This was done by them sending an invoice for £70 per year. They insisted that I pay this amount when I am more then capable to complete and deal with these forms myself, at no cost. Although I had “in writing” from my BRM (Business Relationship Managers) at the time that I would not be charged for this service, as I was going to deal with the completion of this form myself, Punch still took the money out of my account without my permission. When I stopped the Direct Debt payments to Punch, this was followed by a letter from Punch’s Solicitors threatening me with legal action unless I agreed to pay for this service and re instate the Direct Debt. I did not agree to this, because I felt that Punch was abusing our agreement, I decided to stop buying “Beer Tie” products from Punch, and I informed them verbally and in writing on number of occasions. Throughout this period, Punch continued to blatantly interpret, enforce and impose the lease unfairly against me, Punch did not deal with my legitimate concerns and complaints and most importantly, Punch threatened me with legal action, when they had no legal right to do so. They continued to try and impose on me a Rate Valuation Service; which was the start of this unnecessary legal dispute and it was then, that once again I informed Punch that I would stop purchasing my beer from them, even though I was under obligation to do. In August 2005, I received a letter from Punch Solicitors stating that Punch were taking me to court, to obtain an injunction against me for breaching my lease agreement. On 16 September 2005, Punch obtained a temporary injunction in Leeds Magistrate Court, however the Judge gave me permission to file a Defence and Counterclaim against Punch for imposing terms and conditions upon me which Punch were not entitled to do. Also interpreting and enforcing the lease unfairly against me, defence under Article 81 and all costs were reserved. This was then followed by a protracted course of correspondence between my Solicitors and Punch’s Solicitors. During this time, Punch made no any attempt to resolve matters or bring them to an amicable conclusion. I did not have services of a Solicitor Up to the Injunction hearing. During November 2005, having obtained the services of a Solicitor, Punch “without any prior notice”, made an application to Shoreditch County Court for an Order for Possession to evict me, on the grounds that I was not paying any rent. When in actual fact I had notified Punch on several occasions in writing that the rent for the premises was being held by a third party. Furthermore, The Judge during the hearing in September 2005 had not ordered the rent arrears to be paid. After much correspondence between my solicitors and Punch Solicitors the proceedings were discontinued and it was accepted that the rent had been paid. In May of 2006 Punch made an application to The Royal Courts of Justice in the Strand in front of a “Master”, Punch insisted that I had no claim against them and no grounds for a counter claim & defence against them. Punch continued to “pursue vigorously for a permanent injunction” against me. The Master stated that he did not have the power to grant a permanent injunction and said it had to be heard by a High Court Judge. Once again all costs were reserved however my costs continue to spiral upwards. In August 2006, I was given legal advice that I did not have suYcient funds to fight Punch under Article 81 as he anticipated my costs would be in excess of £100,000. I decided to make an application to The High Court to change my Defence & Counter Claim, on the grounds that Punch had imposed terms upon me which they were not entitled to do. Also that they had interpreted and enforced the lease unfairly against me, which included the following: (a) Imposing on me services and charges for Rate Valuation. (b) Delivery of Defective Goods. (c) Imposing on me a Premium Rate telephone Line. (d) Imposing Delivery charges for non normal deliveries. (e) Deliveries made outside normal delivery hours. (f) Delivery of Insurance schedule and Details of Premium Payable without explaining what I was paying for. Please note, under the terms of the lease, I am under obligation to buy all “Beer Tie” products exclusively from Punch, at very expensive prices and in some cases, as much as twice the price of any other suppliers. In October 2006 I was warned to attend hearing in The High Court in The Stand in front of a High Court Judge. By this time I run out of money and I could no longer aVord the services of legal representative for this hearing. A month before the hearing in The High Court, I received a copy of the Insurance Schedule and “1 week” before the hearing I received full credit for two years Rate Valuation Service which Punch had imposed on me which was the start of this entire unnecessary legal dispute. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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To my surprise and amazement, the whole hearing was conducted between The High Court Judge and Punch Barristers as if I was not present. The High Court Judge rejected all my Defence and Counterclaims. And to add insult to injury regarding Premium Rate Telephone Line, The High Court Judge said that I was not under any obligation to use this line and that I can always write to Punch. My case was thrown out, I then had to pay all of Punch’s costs. However, when The High Court Judge saw that Punch was demanding £41,000, he ordered the costs be referred to The Cost Judge unless an agreement could be reached. I made an Application for An Appeal and on 21 March 2007 it was refused as being totally without merit. In October 2007, Punch got a date for cost hearing and The Judge did not take into consideration at any time that the costs Punch were looking for was for damages suVered to the sum of no more than £600. I was ordered to pay £37,898.60. Throughout this period, Punch never once oVered me any additional time or any kind of help to pay these costs. At no stage did they attempt to reach an early amicable resolution to this matter.

2. Poor Quality Products The delivery of beer products are covered under the Supply and Sale of Goods Act, However Punch has had little or no regard for there obligation under this Act.. During the legal dispute and up to few weeks ago, I still continue to receive poor quality products. In January 2008, I started receiving of beer with a very short shelf life. When I double checked, I received kegs of beer with a shelf life of seven days. During the 2004 Enquiry, Giles Thorley of Punch informed the Committee that the shelf life of the beer products supplied has a shelf life of a minimum of three months. When I complained to Punch about this, I was told that it is only 28 days and if I received anything less than that it should be returned during the same delivery. After the delivery is accepted, Punch refuses to deal with any complaints. On a recent Friday evening, two kegs of Becks Vier Beer were flat. When I look at the labels these showed the Beer to have a long shelf life. However on closer examination of the barrels, I could clearly see they were in poor condition and would explain the condition of the beer within. I do feel the poor quality of goods supplied is part of Punch’s ongoing attempts to remove me by destroying my business. The reason I say this is, if I have no beer to serve people with I have people to serve. I am still receiving barrels without seals, damaged bottles of beer and generally poor quality beer products.

3. Premium Rate Telephone Line We all have to call Punch for legitimate concerns and complaints, in relation to deliveries and delivery problems, also with regards to cellar equipment and repairs and other unforeseen problems and complaints under our obligation to purchase all “Beer Tie” products exclusively from Punch. This premium rate telephone line was imposed by Punch from the 30 January 2004. I challenged this when I noticed my telephone bills were increasing in April/May 2004. However I received no response from Punch. Please note, they have changed the number recently but it is still a premium rate number. I have still received no response to my complaints from Punch regarding the new number. Under the 0870 premium telephone line rates, Punch can charge up to 10p per minute and Punch can vary this charge at any time they wish to do so. The financial benefits to Punch using the 0870 number are: (i) Punch earns money from every phone call received, whatever the reason; (ii) Punch has the benefit of making phone calls to any UK land line for FREE, no additional costs to Punch; (iii) Punch does not have any monthly and annual charges; and (iv) Punch earns money from any phone call received 0870 number when diverted to UK land line. The unfairness of these charges is also seen by the fact that Punch does not incur any charges whatsoever by making calls to their tenants as a result of having the benefit of the 0870 number. All the charges are therefore being borne by the tenants. Furthermore these are the only contact numbers, so there is no way of contacting them without incurring this charge.

4. Accounting Practices It was in The Guardian this time last year, regarding Punch Taverns and Giles Thorley, so called The Boss of Punch Taverns. How much money he is earning and how he is the third highest paid Director in the country. Giles Thorley got £10 million in 2007 and similar amounts in previous years. It was also in the news at the same time and also covered in the TV News on all channels, how big companies pay very little or no tax and one of the sectors mentioned which pay little or no tax was the pub sector, ie companies like Punch Taverns. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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I had to carry out great deal of research regarding Punch and their activities to help to win my case. I have obtained from the Companies House over 50 Punch accounts w £3.00 each. One of the areas I needed to research was titles and company accounts to find how my pub got transferred from one company to another and who had the correct title. One of the accounting practises which made things very diYcult was the constant change of names of Punch companies, just before and just after the Punch company sells or and transfers its assets to another Punch company at very reduced market valuation, when the property prices at the time were increasing, they then no pay tax and it becomes a dormant company.All these Punch companies are now dormant companies with losses and in some cases very large losses. In one of the Punch accounts, about four years ago, The Spirit Group was sold by a Punch Company with a £144 million loss as one oV bad debt, changed its name and became a dormant company, with very big losses. Last year another Punch company bought it back when they were rumours of a higher bidder. Is also appears that these dormant Punch Companies issue or and keeps on issuing shares to the Directors of Punch and always the highest amount of shares issued to Giles Thorley and in some cases, the second highest to Robert McDonald, the Finance Director who retired this time last year. It appears on paper that Punch Taverns PLC which was in the 100 of The Stock Market until early part of this year exists for the benefit of “The Directors of Punch Taverns. There is a site on the internet which lists all shares which must be reported. It may be a coincidence but the man who might be responsible for these accounts, The Financial Director left Punch Taverns this time last year. Another Punch Director, Mr. Francis Patton also left last Christmas.

5. Punch and Gambling

Punch has joined up with various gambling companies to provide and encourage gambling in the in their nearly 8000 pubs, ie. Punch Tavern’s with a new “On Line Casino”. Imagine the scenario, William Hill or Ladbrokes customers, while gambling and most of the time losing money, are able to buy alcohol in any betting shop and be under the influence of alcohol and carry on gambling and carry on losing more money. Now imagine the scenario the other way. People drinking alcohol in pubs and while they are drinking many of these Punch tenants and leaseholders will be obliged to sell these casino cards or encourage gambling to their customers to make ends meet and make considerably more money for Punch Taverns. This is due to the pressure being put on tenants and leaseholders though so called BRM’s. As everyone knows, a smoking ban is aVecting the pub trade. Punch is constantly coming up with more ideas or and ways, regardless of the coincidences, to make more money for Punch in order to be able to cover their very heavy debts and borrowing. One of the conditions in the lease which Punch used against me to help to win their case is that, Punch has got the right to introduce other services and in a nutshell, Punch can introduce and impose on their tenants and leaseholders any other services they like. Once this starts, due to poor trading in the pubs partially due to the smoking ban, it will lead to plans to turn each pub into “Small Pub Casinos” and kill oV the “Traditional British Pubs”. It has always been illegal to gamble with money in a pub, and paying for this voucher to gamble or and any other form of gambling is no diVerent. The customer gambling in a pub under the influence of alcohol (a person drinking a pint or two pints is under the influence of alcohol). Punch Taverns, the biggest pub company, should not be able to get away with any loopholes or and clever ideas and start to impose this “Service” on their nearly 8,000 leaseholders and tenants. There are many tenants and leaseholders struggling out there. Punch will put pressure and make deals with tenants and leaseholders in return to introduce On Line Gambling in Punch pubs, especially the vulnerable and the ones struggling to make ends meet.

6. Rent Review

It is a myth that rent reviews are carried out by BRM who is someone working closely with you and understands your business and the area etc. I have had so my diVerent BRM’s it is impossible to build a proper working relationship when things are constantly changing and their conduct. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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My rent review was carried out by “Portfolio Manger” just like an Estate Agent and whose ultimate goal is to increase the rent by whatever means possible. I informed this “Portfolio Manager” that I have successfully agreed a reduction in my Rates with the Rates Valuation OYcer working for the Government. This was due to the fact that my turnover is not going up and is actually going down and all over heads and running costs are constantly increasing. Portfolio Manager’s response was, Punch does not operate like that and they look at the market value etc and Punch works out the rent if the Pub was going on the market on that day and it had nothing to do with the trade. I have got the copies of the correspondence and to cut a long story short, he demanded an increase or we have to go to Arbitration as per his letters. Please note, my lease is index linked and it goes up automatically every year according to the oYcial government statistics. Bearing in mind I have had a legal battle with Punch and no funds available, I had no alternative but to agree to the increase because I could not aVord the additional legal cost for Arbitration. It is very clear to me that Punch would use all means possible to increase the rent: “The most important reason why Punch likes to control Rate Valuation is that if the rate does not go down, it automatically justifies the rent increase”.

7. Punch and Freeholder

Since the rent review with the Portfolio Manager, I have been approached on number of times to agree to be repositioned regardless of the consequences to me and my business. Punch does not own the freehold and the freeholder needs my pub to develop the site which Punch is in agreement. Furthermore, I have learned that the freeholder wanted to develop the site for some years now and I believe it is for this reason; Punch has dragged me through the High Courts at very considerable expense and finical ruin, in the hope they would remove from the premises and allowing them to proceed with any redevelopment plans unhindered by my presence.

8. City

Due to a fall in share prices, The City started to look very closely at the Pub Companies and especially Punch who have the largest debt and borrowing. And I quote” Investor concern over the health of the nation’s two biggest pubs groups, Punch Taverns and Enterprise Inns, gained momentum over the summer and shares in both have now lost more than half of their value since the start of the year”. You do not need any better proof or and hard evidence better then from the City Analyst and I quote: 1. “Morgan Stanley’s Jamie Rollo said that rents have been growing faster than inflation and pub sales while pub co profits have been growing at a faster rate than lessees, financial assistance is on the up and the number of pubs available for lease is rising. “Rents have been rising for at least 15 years now, he went on to say and I quote “There is also some evidence that pub companies have been taking a bigger share of the pie than their lessees. Rollo said that monitoring of the pubs available on Punch and Enterprise’s websites showed an increase in lessees exiting the industry with between 14"16% of the estate now vacant⁄up from 12"14% last year. 2. Merrill Lynch analyst Jamie Rollo wrote in a recent research note that 20% to 30% of Punch and Enterprise’s leased pubs were now uneconomic, with licensees making less than the 20,000 pounds a year considered necessary to make a pub worth running. 3. Mark Brumby of Blue Oar Securities was also critical of Punch and Enterprise’s treatment of tenants. “They’ve ratcheted up rents time and time again and jacked them up to such a point where the pubs are running on a margin which is uneconomic,” he said. 4. Brumby expects the rate of closures to go down before the Christmas holiday season before accelerating again in January. “The pubs will bend over backwards to stay open for the second half of December which is a complete windfall. The first week of January is going to be when reality dawns,” he said. 5. Charles Stanley analyst Sam Hart believes Punch’s balance sheet is overleveraged and further measures in addition to the dividend suspension will be required to shore up cash. “Debt covenants will probably have to be renegotiated and the possibility of a rights issue, debt-for-equity swap and disposals cannot be completely ruled out,” he said. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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6. The Financial Times quotes analyst Charles Winston of Redburn Partners, who believes that Punch must sell around £335 million worth of pubs to avoid further refinancing. “Punch’s problem is that it has placed pretty much all of its assets into securitisations but it has left some debt outside,” analyst Charles Winston told the paper. “Given that the cash is likely to be trapped within all three of the group’s securitisations in the coming years, this asset/debt mismatch means that it really has very few options”.

9. PR by Punch and BRM’s Since it was announced that there would be an Enquiry into Pub Companies again, the trade papers, which are all clearly influenced by the power of the Pub companies are full of PR exercises regarding how well and how much the Pub Companies are helping, all their tenants. I registered my complaint with my BRM about these press reports which are very biased and untrue but I have not heard anything from Punch or and from my BRM.

10. Monopoly There is no competition between The Pub Companies. Each pub company does as they please at the considerable expense of their tenants & leaseholders. All Pub Companies have very large buying & controlling power from all beer manufactures and all Pub Companies control pricing. It is for this reason; we constantly see major price diVerences between pubs and supermarkets. As I quoted above—Morgan Stanley. . . “There is also some evidence that pub companies have been taking a bigger share of the pie than their lessees” Mark Brumby of Blue Oar Securities was also critical of Punch and Enterprise’s treatment of tenants.

Summary Punch’s conduct and Punch’s representatives conduct including providing false and inaccurate information for the Injunction and Summary Judgment is well documented. Punch, in fact alleged that it had been denied access to the property on various occasions when such allegations were clearly untrue. Despite numerous requests, from myself and my previous solicitors HLF, as of today’s date, I still have no idea what was carried out in my pub by the Punch’s representative or agent on 24January 2006 when I was absent from the Pub—wires were cut and despite requests as to what was carried out in my absence, I have not been given any information whatsoever. Recently, during another visit by Punch’s representatives, after the inspection, report was produced and asked a member of my staV to sign this when I was not present. No copy of this report was left. After many complaints, a copy has been provided but despite all complaints to Punch & BRM, no one informed me of what is written in this report. Given Punch’s conduct, I am of the firm opinion that Punch would use any threat to enforce the Injunction against me, as they did previously when Punch’s representatives Brulines, who on occasions when they have attended my property, have made it clear that they can do what they like as they have the benefit of the Injunction. As I mentioned earlier, Punch has nearly 8000 tenants and leaseholders. If Punch is allowed to abuse their power and position, blatantly interpret, enforce and impose the lease unfairly by imposing Rate Valuation Fee’s, Delivery Charges, Premium Rate Telephone line’s, Defective Products and other new conditions, services and charges as Punch wishes, on every £100 obtained unlawfully by Punch, it is £1 million pounds clear profit to Punch. On every £1,000 obtained unlawfully by Punch, it is £10 million clear profit to Punch and I am of a firm belief that Punch employ BRM’s for this reason bearing in mind the conduct of BRM’s If Punch is allowed to make such profits in breach of their implied obligations and/or when they are not entitled to impose such charges by abusing the power or position then I would suggest that Punch is making an unlawful and wrongful profit: “Punch is a very ruthless company and they do not take any prisoners. Punch is getting away with what is not in the lease agreements. Punch, blatantly interprets, operates, enforces and imposes the lease unfairly towards all Punch’s nearly 8000 tenants and leaseholders, Punch imposes new services and conditions, Punch does not deal with legitimate concerns and complaints, Punch always threatens with legal action, when this fails, Punch drugs hard working leaseholders & tenants through High Courts of this Country at considerable costs and financial ruin, unless you agree to submission and ONLY under Punch’s terms”. 22 September 2008 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by Simon Clarke

1. Rent Review We have a small, back street community pub, The Eagle, we had a rent review due in November 2006. In May 2006 having, heard nothing from our landlord, Enterprise Inns plc, we instigated negotiations and requested a rent review notice. Our Business Development Manager (BDM) sought to agree the rent by discussion, indicating the formalities could be bypassed, and implying a rental increase from £52,000 to £70,000 might be provable but he would settle for £59,000 if we agreed without a quarrel. We again asked for a rent review notice, refusing to discuss the matter until it was received. Eventually a notice arrived but without a proposed rent, this threw into question the validity of the notice itself so we again requested a ‘valid’ notice with a proposed rent. We believed the pub to be over rented and were seeking a rent reduction, both our BDM and Enterprise Divisional Director indicated that the rent could not go down given we had an upward only rent review (UORR) clause in our lease. When we pointed out that Enterprise Inns had given statements to the Select Committee in 2004, to the eVect that they would no longer enforce UORR clauses, we were told that we should check our sources. We subsequently sent a copy of the relevant statement to both the BDM and Divisional Director of Enterprise Inns and asked them to confirm that the rent review clause would not be enforced (see copy email dated 24 September 2006). Neither responded to our request. Even a basic open market rental valuation requires a number of variables, barrelage, rate per barrel, gross profit and costs. Whilst Enterprise Inns provided a rental calculation we repeatedly asked them to oVer evidence to support the variables used therein (I have dozens of emails to prove it). This evidence was never provided and as a result we began to suspect that Enterprise had simply established a desired rental and manipulated a valuation to fit. After several months with no progress we suggested that the matter should be referred to Arbitration. Enterprise Inns seemed reluctant to proceed to third party (presumably as they knew the property to be over rented) and would not respond to our request preferring to continue, after the rent review date, with us paying the previous excessive rent. This was unacceptable and we, the tenants, referred the matter to Arbitration (relatively unheard of). Even self represented against Enterprise Inns appointed professional representative we successfully argued that the rent should be reduced. The Arbitrator agreed with our view and concluded that the rent should be reduced by approximately 12% from £52,000 to £45,750. To the best of our knowledge this is the only time a tenant has successfully taken Enterprise Inns to Arbitration and succeeded in arguing a rent reduction. In total the whole exercise took more than two years and remains undocumented by Enterprise Inns. Our point is that there was no transparency in the method in which the rent was calculated and that the Pubco tried to deceive us in both the negotiation and, later, in respect of their position on UORR’s. We were lucky,Enterprise Inns had overlooked that I am a qualified Chartered Surveyor with several years experience in rent reviews, we had no professional fees to meet in the procedure. To an average tenant, the cost would have been to the order of £20,000 for their own professional fees. If they lost they would been liable for both the entire Arbitrators fee (£14,000 in this case) and those of Enterprise Inns, in total they would have to risk in excess of £54,000 just to prove their opinion of value was right. Given our rent was £52,000, I believe any one will agree, to risk over a years rent on a one man battle against a FTSE 100 registered company, with a property portfolio of around 7,500 pubs worth around £5 billion and a share value of over £4 billion (at the time), who have appointed a former Director of Humberts International, with over 20 years experience, in pub valuations and rent reviews, might be somewhat unwise. We, however, needed to make a point and fight our corner, for all tenants—and we were proved right. I believe the technique is nothing more than “bullying” and the reason so few tenants proceed to third party referral is the cost and time implications, if they lost it would mean probable bankruptcy. A nominal increase in rent, justified or not, is still considered a lesser risk than Arbitration. Enterprise Inns will argue that there are few tenants taking rents to Arbitration—I consider this is not an indication that they are satisfied with the valuation it is an indication that they are too scared to take the risk. From 13 June 2006 we asked the BDM on at least 13 occasions to supply information substantiating their rent proposal, it never came. We had a good result, our rent was reduced. We remained, however, of the opinion that the Arbitrator had made a mistake in his assessment of the variable, gross profit, and that his Awarded rent was still unrealistically high. In accordance with Arbitration legislation we requested the Arbitrator reconsidered this element of his Award, he chose not to alter his decision. It later became apparent that the Arbitrators company, Davis CoVer Lyons, in fact had relationships with Enterprise Inns, our landlord, that were not disclosed during the Arbitration process. The Arbitrator subsequently apologised for this lapse. This may have been considered a ‘conflict of interest’ and is being investigated by the RICS. A conflict could have been considered a serious irregularity and a justified argument to dispute the Arbitrators Award. Enterprise Inns oVered to remove our UORR clause (which they had stated at the last Committee would be removed from leases where they still existed unconditionally see attached Appendix 2) in exchange for our agreement to the Award. We elected to accept the oVer on the 17 July 2008, our review remains undocumented and our rent review clause remains in place. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Gordon Harrison and Ted Tuppen indicated to the last Committee that Enterprise Inns would be removing upward only rent review clauses, ours still remains despite repeated requests to remove it and we are aware of no instances where it has been removed unconditionally from an existing lease. Enterprise Inns will argue that their new leases ‘Retail Partnership Agreements’, typically 10 years long, do not have UORR clauses, however, they neglect to mention that the agreements are outside the provisions of the Landlord and Tenant Act and therefore oVer the tenant no rights of renewal or compensation at the end of the term.

2. The Tie We estimate that we pay an additional “wet rent” of in excess of £40,000 per annum (this is conservative working on the basis of £100 per barrel) over and above our property rent of £45,750 (subject to RPI increases). The equivalent “normal commercial rent” is therefore currently £85,750 per annum. There is plenty of evidence, that we are sure will be presented to you, by parties more qualified than ourselves to justify that our rent should be to the order of 16% of net turnover, or £50,000, FREE OF TIE. Surely anyone can see the inequity of this system. We would happily accept a straightforward property rent as an alternative to the current tied arrangement. I find it amazing that Pubco’s are still trying to convince those less well informed that the part tied tenant is in no better or worse position than the free of tie tenant.

3. Select Committee 2004 The Select Committee in 2004 issued concerns to which Enterprise Inns responded—I consider this Committee would do well to review some of that dialogue and I include comments of my own.

Issue — The link between the wholesale beer prices charged by pubcos and the rents they charge their tenants. — Pubcos’ margins with regard to the prices paid by pubcos to breweries and those they charge to their tenants. — The diVerence in the beer price that pubcos charge their tenants and the free market price.

Concern Is the combination of rent and beer prices charged to licensees under an Enterprise agreement unfairly expensive to licensees, does it lead to higher prices for consumers and does it constrain a licensee’s ability to compete eVectively?

Response 2.1 Licensee “RENT” constitutes a variable combination of “property rent”, “wet rent” and “machine share”, which in total equates to a normal commercial rent. Not so. Say a pub sells 200 barrels its turnover net of vat is £200,000. A “free of tie” pub rent:turnover ratio is widely accepted to be around 14–16% (evidence) this is a straight forward property rent only of £28,000–32,000, no wet rent, no machine income. The same pub, but with a beer tie only, should have a rent:turnover ratio of 11-13% (evidence) the property rent would be £22,000–26,000 the cost of the tie is around £180 per barrel, equating to approximately 18% of turnover, the “wet rent” is therefore £36,000. It follows that the equivalent “normal commercial rent” for the tied house is £58,000–62,000 (property rent plus wet rent) or 30–32% rent:turnover, almost double that of the free house. This does not equate to a normal Commercial Rent. 2.2 Licensees can make fair margins on tied products supplied by Enterprise. In our rent review an Arbitrator anticipated an overall margin of 58.5%. We actually achieve 52-54% but our Pubco (Enterprise Inns) objected to our actual figures being submitted. As a result, in order to achieve the same profit margin we would need to increase the product price to customers by 12.5–14.6%. As it is, like many tenants, we recognise that increasing prices to accommodate our Pubco’s false impression of our “fair margins” will deter customers and lead to diminishing sales. Tenants like ourselves have tried to absorb the costs and as a result our proportion of net profit (which is supposed to be 50:50 with the landlord) is unfairly diminished. Landlords get a higher margin on products and, because this is not recognised at rent review or Arbitration, end up with a larger proportion of net profit than they are entitled to. The tenant loses both ways. 2.3 Enterprise’s track record of adjustments to product pricing demonstrates that prices and price increases are broadly in line with the UK market. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Have Enterprise Inns provided any evidence to this eVect? They should be required to supply their own price lists which can then be compared to those of a wholesaler. It should be clear by the sheer backlash that the above Enterprise statement is nothing more than propaganda. 2.4 . . . and the increases to, and commitments made in relation to, licensee discounts demonstrate the Company’s fair and equitable approach. There are discounts for some pubs these appear generous, however, the greater the discount the greater the gross profit margin and therefore the “normal commercial rent” will be higher to reflect the level of discount available to a tenant. A pub with a large discount simply pays for it in the form of a disproportionate increase in rent. Discount equals higher rent, the tenant has gained nothing, what is fair and equitable about that ? 2.5 Price is not the principal factor which determines the nature of competition in a local marketplace. There are many factors determining the nature of competition in a local market place but to discount price as altogether irrelevant is an insult to anyone’s intelligence. 2.6 An Enterprise tenancy or lease agreement provides potential opportunities for trading profit. Given the level of pub closures over the past few years it is clear the actual trading profit is not suYcient to sustain a reasonable standard of living. The proof is in the pudding. 2.7 . . . and capital growth through the successful assignment of the unexpired term of a lease agreement. A positive premium is not simply a reflection of profit. A premium on assignment can be based upon several factors, parties will also consider their perception of latent value, potential, job security, domestic security (accommodation). Just because a premium is achieved it does not follow that the pub in question has a healthy or sustainable gross profit. 2.8 The cost of entry, and risk profile for a licensee under an Enterprise tenancy or lease agreement is lower than that for a comparable free house. My pub has been valued at £610,000 and pays a rent of £45,750 per annum, the cost of the tie is £40,000 (400 barrels x £100) it follows that our annual “rent” (property rent plus wet rent) is £85,750. A 10 year commercial loan can be approved at 3% over base and therefore would equate to 8.5% (at the time of writing). It follows that I could, if the Pubco would sell at market price, buy my freehold and pay around £112,850 per annum in interest and capital repayment and potentially own the pub outright in 10 years with no loan repayments, Plus I would be able to negotiate my own discounts direct with brewers and suppliers and I conservatively estimate these would amount to £40,000 (400 barrels x 100). This saving could be oVset against my repayments and therefore my overall annual outgoing would be £72,850 (£112,850—£40,000). The annual outgoing is less and more importantly not subject to rent review or annual RPI increases. The cost of entry and risk profile for a licensee under an Enterprise tenancy is therefore higher NOT lower than that for a comparable free house. 2.9 A wide range of fairly priced opportunities exist for licensees wishing to acquire a free house in preference to entering into a tenancy or lease agreement. Comparatively, few freeholds come to the market, as the number of pubs in the UK is diminishing at an alarming rate, those that come available are generally bought by Pubco’s as they are aware that the investment value of the property and wet rent combined outweigh the freehold value to an owner occupier. 2.10 Enterprise invests substantial capital into its estate annually. Where? I have known my pub for over 16 years and other than actually investing the capital to purchase am aware of no addition investment over the entire term. 2.11 Enterprise utilises its purchasing leverage to secure advantageous terms for tenants and lessees. We are unaware of any advantageous terms passed on to us that are better than those available to us in the open market. In fact many are worse. 2.12 Enterprise licensees may receive goods and services from Enterprise which can provide added value, real benefit and competitive advantage. All goods and services oVered to us by Enterprise come at a price which render them ineVective. We have seen no reason to accept any goods or services oVered by Enterprise in our entire period of ownership. Enterprise wish to imply to people like Select Committees that they oVer something over and above simply being landlords and collecting rent but in reality we see the goods and services as no benefit to us what so ever. 2.13 Enterprise makes reasonable profits for its shareholders and has demonstrated that attractive returns to investors are not at the expense of licensee profitability. Shareholders, until recently, have indeed made reasonable profits, some might say extortionate profits. It is now a well known fact that hundreds of licensees have failed and gone into liquidation, if their profitability were maintained then I would suggest they would still be around. 2.14 The targeted growth in profits will not be achieved at the expense of licensee profitability or consumer choice. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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The prospect of a growth in profits for Enterprise is now a looking somewhat uncertain but it should be clear by the sheer number of pub closures that previous profits has been at the expense of licensee profitability. 2.15 The majority of Enterprise licensees are profitable and are able to fulfil their financial and repairing obligations. I refer you to the Morning Advertiser article dated 10 September 2008. A Morgan Stanley analyst has stated that he believes 20–30% of Enterprise and Punch leased pubs may be “uneconomic” because the licensees are making under £20,000 a year—the level considered to be the minimum to make a pub worth running. 2.16 Enterprise recognises that its reputation in the marketplace and its ability to attract and retain well qualified, profitable licensees is the key to its long-term success. How many tenants have been refused an Enterprise Inns pub on the basis their Business Plan is not adequate? I know of none. Enterprise grants leases takes a rent deposit and rent in advance and if the tenant is unsuccessful Enterprise have the best part of 4 months rent on account before the pub will actually start costing them money (plus I am led to believe that included in the insurance policy is a clause oVering protection against tenant failure, this is of course reimbursed to Enterprise Inns by the tenant in the form of building insurance premiums). In this four month period they either seek another unwitting tenant or pursue planning permission for change of use/redevelopment based on the argument that the pub is unsustainable. The investment value as a tenanted pub is considerably less than the redevelopment value with vacant possession. Once sold the income derived from sale is used to buy further pubs to include in the freehold ‘churn’ policy thereby diminishing the number of pubs available to free traders still further. 2.17 Evidence indicates widespread licensee satisfaction with the fairness of the Company’s approach, through its success in recruitment . . . and in its rent review negotiations... andinits handling of complaints. What evidence? I am an Enterprise Inns tenant, neither I, nor any other tenant I know is satisfied with the fairness in respect of the above. Given that I have just negotiated my own rent review that required me to take Enterprise Inns to Arbitration I have contacted many tenants with a view to obtaining comparable evidence for valuation, not one tenant has indicated satisfaction. 2.18 Evidence indicates that Enterprise’s relationships with its tenants and lessees are improving. What evidence? How many tenants have submitted evidence indicating the latter to this Committee? In conclusion, if the Enterprise were asked the same questions again today they would be unable to oVer the same answers, any answers should be evidenced and an opportunity oVered for tenants to comment. Enterprise Inns were far from transparent in respect of the calculation of the rent review, they were intimidating and unhelpful. The tie is detrimental to us and we can think of no benefit to us from our ‘partnership’ with our Pubco landlord. We, like many tenants, would consider purchasing our freehold if it were made available at an open market value but we are informed Enterprise Inns will not entertain freehold purchase discussions. The UORR clause that Enterprise Inns stated they would remove at the TISC is still present four years later. The current circumstances and tenants outcry that have led to this inquiry should be suYcient to convince any reasonable man that Enterprise Inns have not adequately complied to the Select Committees recommendations and that any purported claims that progress have been made are no more than paying lip service to this current inquiry. The Pubco’s are too powerful for tenants to deal with and therefore require ‘policing’ by Government and legislation. I confirm that I have copious documentation in respect of all my statements above and would welcome the opportunity to be questioned as a witness in the presence of the Committee. I do not doubt much technical information and opinion will be oVered for the Committees consideration and consider my unique position as a surveyor and publican could prove useful in many areas of interpretation. 27 September 2008

Supplementary evidence from Simon Clarke Thank you for allowing me the opportunity to speak at the first Committee meeting in respect of the above on 19 November 2008. I should point out that our Arbitration result, a rent reduction of 12%, is to the best of our knowledge the first and only time this has ever been achieved against a Pubco. I was all too aware that we were pressed for time and that Mr LuV, quite rightly, was keen to try and draw the proceedings to a close. Rather than enter into a lengthy debate on Mr Willis’ answers I considered my response would be better outlined in a further short submission to the Committee which would clarify my opinion. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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In his final question, to the witness Mr Martin Willis, Mr LuV asked, loosely, “if the valuation approach used by the RICS is working so well then why are the problems heard today being described and why are 20–30% of tied pubs are not economic due to high rents?” Mr Willis replied “I don’t think anyone is arguing with the profits method of valuation” No one is arguing that the RICS method, in principle, is the best method available at this time BUT it does not accommodate the recommendation from the 2004 Inquiry that tied tenant should be no worse oV than the free of tie tenant. The “tie” (wet rent) is not adequately allowed for and until it is the tied tenant will always be worse oV. “Essentially problems faced by the industry at the moment are largely down to the recession which is eVecting every other form of commercial property in particularly small businesses” (Martin Willis). The current economic climate is having a significant eVect on all businesses but pubs have been exploited for so long most licensees have no “war chest” to weather the storm. No one has had the opportunity to save for a rainy day and now we have the perfect storm. “Any business, maybe a small shop, could have had a five year rent review where rent was agreed in a boom period, of course trade has dropped oV and there has been increased competition from the major retailers. Its eVecting all small businesses.” (Martin Willis) Those same “small shops” do not have inflationary increases every year when trade is in decline, they are not tied to buy products from a single source. Using the witness Mr Paul Daley’s example, in session one, if you rent a house and buy your household goods from say Marks and Spencer, and times get hard, you seek cheaper products elsewhere, and shop at Asda. You would not think it fair to be forced to continue to buy expensive products from M&S who may at any time choose to increase their prices still further. “We read in press that several pubco’s have ploughed several million back to licensees.” (Martin Willis) See the Morning Advertiser 30 September 2008, Enterprise Inns has shelled out £5.5 million to 850 struggling tenants. Sounds a lot, big number—lots of noughts! Actually, amounts to an average of £124 per week for each of those tenants. We can assume these tenants are suVering severe financial crisis otherwise they would not have sought help. I do not believe that an average of less than £18 per day is going to save them. This is just a publicity stunt. “Certainly recession and economic situation over last 15 months is causing all sorts of problems.” (Martin Willis) Five pubs are day are shutting their doors for good; 33% more than the same period in 2007. Pubs are now closing five times faster than in the same period in 2007. Pubs are now closing nine times faster than in 2006 and 18 times faster than in 2005.” Whilst the economic crisis is no doubt playing its part in the rate of Pub closures clearly this accelerated rate of closure started long before our current recession and the smoking ban. The current economic hardship faced tied tenants has merely deflected from the fundamental culprit— the tie and the Pubco’s. Mr Willis openly agreed that the tie (wet rent) is not considered in the RICS valuation method (confirmed in the Arbitrators Award quote attached full details available on request). The RICS valuation method for Pubs is drafted by the “Trading Related Valuations Group”. Rob May of Enterprise Inns was Chairman and now Mr Willis Chairs this group, whose company derive significant fees from Pubco’s, particularly Enterprise Inns. It comes as no surprise to me that the RICS valuation approach is detrimental to tied tenants given the Pubco’s influence over the Trading Related Valuations Group. I appreciate the Committee may find it hard to make the abolition of the tie a statutory requirement. The Pubco’s will no doubt argue that it would be an administrative nightmare. Would it be simpler to require the RICS modify the valuation method to encompass the recommendation that “tied tenants should be no worse oV than the free of tie tenants?” Pubco’s, without the financial benefit gained at the tied tenants expense, would probably remove the tie themselves as it would no longer be to their advantage to maintain it.

Interim Award with Reasons

Eagle Ale House, 104 Chatham Road, London SW11 6HG, January 2008

Page 19

Alternative Valuation Approach 61. In addition to the profits method of valuation, Mr Clarke has considered an alternative approach whereby the rent paid by the tied tenant is calculated by first establishing the notional rent payable on a free of tie basis then deducting the supply discounts available to the free of tie tenant, which he describes as “wet rent”, leaving a “dry rent” payable by the tied tenant. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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62. This approach is rejected by Mr Gooderham (the “independent expert” employed by Enterprise Inns) . . .. I concur with Mr Gooderham that there is no compelling reason to calculate the rent on this basis.

Arbitrator T M E Munden Bsc FRICS Davis CoVer Lyons 19 November 2008

Further supplementary memorandum from Simon Clarke

I am probably prohibited from saying exactly what I mean when referring to much of the verbal evidence submitted by the Pubco’s yesterday, so will borrow a quote from Winston Churchill.

I believe elements of Messers Tuppen, Townsend and “The Giles’” statements to be “factual inaccuracies”. I had a brief discussion with Mr LuV after the hearing and mentioned that I understood the diYculties the Committee must be experiencing, determining fact from fiction. I realise that I am in one camp and the other is bound to have an opposing view, however, if I could demonstrate one or more of the statements to be untrue then hopefully the Committee would attach only little weight to the evidence submitted by the Pubco’s.

To this end I suggested to Mr LuV that he, or any member of his team, comes to the Eagle Ale House for a demonstration of the Brulines system.

Both “bosses” suggested this equipment was a sophisticated metering system which, in the words of Mr Thorley, can determine the “density” of beer and water. This is simply not true and I can prove it very simply. The equipment is eVectively nothing more than a spinning wheel with a counter detecting how many times it goes round, as it cannot determine the diVerence between beer and water the system “overcounts”, giving the impression that more beer is being sold than supplied, many tenants have been falsely accused of buying beer outside the tie and have been fined by the pubco’s accordingly. Faced with “apparently” solid scientific evidence, supplied by Brulines, backing the Pubco’s claim of “stealing”, tenants pay the fine rather than going to court and running the risk of forfeiture of their lease.

Enterprise Inns have accused the Eagle of buying out on a number of occasions and on each we have proved the figures provided by Brulines to be wrong—it does not determine the density of liquid in the pipe.

Brulines have basically altered their assumed volume of water to accommodate the high cleaning standards we operate. Their assessment of our dispensed beer is therefore nothing more than an educated guess.

My point is that the Pubco’s clearly misled the Committee on this issue and therefore all their statements should be considered questionable.

I believe members of Fair Pint will be touch with further evidence to show that elements of the Pubco statements are untrue. December 2008

Further supplementary evidence from Simon Clarke

You will be delighted to hear this is my last submission (unless you require more information). My aim now is to prove that the statements made by the Pubco’s are unreliable as evidence in some cases factual inaccuracies or attempts to mislead the Committee.

Hopefully by showing a few points that are easy to disprove the Committee will attach a greater degree of scepticism to any other statements made by the Pubco’s.

If the Committee are in any doubt about how Brulines beer monitoring equipment works then I would encourage them to visit me at The Eagle where I can give a simple 10 minute demonstration to fully explain the system. Do not take the word of the Pubco’s or Brulines apparently extensive information. I need not remind the Committee that the CEO of Brulines Mr Derrick Collin was convicted in August 1986 at Ipswich Crown Court on charges of conspiracy and blackmail. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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TISC Conclusions

Q212 Miss Kirkbride: Mr Tuppen, do you roughly agree with those advantages for yours rather than repeat what has just been said? Mr Tuppen: Yes, I am glad to say that we have an even greater variety at Enterprise Inns of beer supplied to our pubs, ……………………….. There is just one point, I think, for clarification that I would like to draw your attention to, and I am sure you have read it, but the 2004 TISC inquiry did conclude that “the tie usually balances the costs and benefits available to tenants” and that “the existence of the tie provides demonstrable benefits to both tenants and customers alike”. Ted Tuppen said (twice) that the previous TISC did conclude that “.. the tie usually balances the costs and benefits available to tenants and that the existence of the tie provides demonstrable benefits to both tenant and customers alike…” I think he is referring to the para. below, if so, it is incomplete and therefore, I believe, a deliberate attempt at misleading the Committee. 188. It should be remembered that this Inquiry stemmed from complaints about inequalities in the contractual relationship between pubcos and their tenants. On the basis of the evidence presented to us we feel that the immediately quantifiable cost of the tie is usually balanced by the benefits available to tenants. However, this does not mean that for every tenant the costs equal the benefits, leading to some tenants getting into financial diYculties. In such cases pubcos could do more to redress the imbalance. Indeed, it became clear as the Inquiry progressed, that some pubcos demonstrated greater sensitivity to tenants problems than others. From page 54 of House of Commons Trade and Industry Committee, “Pub companies” Second Report of Session 2004–05 http://www.publications.parliament.uk/pa/cm200405/cmselect/ cmtrdind/128/128i.pdf Mr Tuppen (cont) Now, the TISC in 2004 did not conclude that the tied tenant should be financially no worse oV than the free-of-tie tenant. That was never a conclusion. It was never a recommendation BUT it was an endorsement of EU competition law. 8 The benefit of the tie to tenants 133. Pubcos do not deny that their tied tenants pay higher wholesale beer prices than other public house operators. The oVset, or “countervailing benefit”, to the tenant is in the form of a lower than commercial, or free of tie, dry rent (rent) and special commercial or financial advantages (SCORFA).170 Under EU competition law, contracts containing an exclusive purchasing obligation, such as the beer tie, have only ever been permitted if they provide such ‘countervailing benefits’. The theory is that the net cost of the beer tie to the tenants makes them no worse oV than if they were free of tie.171 Directly cut and paste from page 41 of House of Commons Trade and Industry Committee, “Pub companies” Second Report of Session 2004–05 http://www.publications.parliament.uk/pa/ cm200405/cmselect/cmtrdind/128/128i.pdf

Brulines

Q260 Mr Bailey: Brulines—there are complaints that they are designed to measure beer and potential fraud, but actually they fail to distinguish between water going through the process and the result is that there have been false accusations made against tenants. Could I have comments from those who use Brulines? Mr Kendall: Yes, I can comment on that. You can actually measure the water that goes through, so that is not factually correct. Q261 Chairman: Could we have a technical note on that rather than spend time on it now? Mr Kendall: Yes. Mr Thorley: The simple answer, as hopefully most of us will be aware, is that beer is a diVerent density from water, so it actually measures the diVerence in the density of the products, so, therefore, as you are well aware, when you are cleaning a line, that is already factored into the volume that goes through the flow meter. I am happy to provide a more technical analysis of that. Not true. I attach photos (Not printed here) of a Brulines Flowmeter. If any member of the Committee would like a full demonstration of the device I would be pleased to arrange a visit to my pub (The Eagle Ale House—its only in Battersea). If unable to attend then hopefully the photos speak for themselves, I have placed a pound coin adjacent for scale. Quite simply as fluid goes through the device a little “water-wheel” spins round sending a message to Brulines HQ by mobile phone, a certain amount of revolutions equate to a half pint measure—simple as that! There is no “sniYng” the liquid, or “holding it up to the light” apparatus determining density. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Insurance Q254 Mr Bailey: First of all Mr Tuppen: We can answer that. Mr Townsend: On new lettings Mr Kendall: From our perspective Mr Townsend: The final point………………on this idea of business failure, and Mr Hoyle was about to raise it earlier I think, it has been suggested to this inquiry that we have no fear of a business failure or a closed pub because of some insurance policy that covers us for two years’ loss of rent. That is a complete fabrication and really we need to put the sword to that idea. There is no insurance policy that can cover Enterprise Inns for the loss of rent or the loss of income in a pub that has been closed down through a business failure or abandoned; that is a total fabrication. It is an absolute cost to us and we will do everything we can to prevent that business failure. I attach two extracts from separate leases (one being my own) which clearly indicate that there is an insurance policy covering loss of rent, in the case of the “Eagle Ale House” for three years loss of rent (Clause 6.1) and two years for the “Manor Arms” (Clapham Manor Street, London SW4 6ED)

Extracts of Eagle Ale House and Manor Arms Insurance Clause from lease Insurance 6 6.1 The Landlord covenants with the tenant at all times during the Term to keep the Premises (except the thereof) insured (unless the insurance is prejudiced by reason of any act omission or default on the part of the Tenant) against loss or damage by fire and such other risks as the Landlord shall from time to time think fit and shall insure loss of three year’s open market rent of the Premises and export’s fees.

Estate Valuation Q265 Mr Clapham: Just turning to the point you made a little earlier when you referred to a re-evaluation of your estate, did it indicate that you have previously been over-valued? Mr Tuppen: When this valuation was done, it was done on a pub-by-pub basis because you do not look at the whole thing and value it on a spreadsheet, Humberts undertook this years valuation of the Enterprise estate. They wrote to tenants indicating they would be valuing the entire Estate but would only actually inspect a “representative sample”. The valuation was therefore done primarily on a spreadsheet basis. Humberts did not inspect the Eagle Ale House, this is not a valuation on a pub by pub basis. Also it is worth noting that Humberts were in administration last the year and following valuing the Enterprise and Punch (I think) portfolios they are to survive another day. Is it just coincidence that Enterprise and Punch get a portfolio valuation (which has been considered by many as highly questionable) and Humberts get fees to cover their financial diYculties. I wonder if the funds necessary to save an ailing firm of surveyors/valuers are exactly the same as the fees paid by the Pubco’s for their portfolio valuation. More details on Humberts in administration: http://business.timesonline.co.uk/tol/business/industry sectors/construction and property/ article4117268.ece like a banker might, This is not true. The valuation should be on the basis of the open market value, ignoring any purchaser with a special interest such as a wholesaler, assuming that the pubs were not part of a fire sale but reflect a realisable value that would look to the profit of the business to be able to both fund realistic debt levels and a liveable income for the owner operator, and that is the basis on which a banker may consider. The valuations are in fact carried out on that very basis but the profitability of the pub is enhanced by the additional profit that can be achieved by the special purchaser namely a wholesale profit stream plus any other profit stream that may be developed such as listing fees, awp royalties, top slicing of awp income etc. In other words the properties are not values on the realisable value on an individual basis even if they consider every single pub. The profit base that should be used for individual valuation is inflated. Instead of valuing those other income streams as separate, intangible, assets they have been merged with a view to increasing the apparent tangible asset worth. As a surveyor and valuer I am concerned at the approach of “inflating” the profit basis and consider income streams should be valued separately rather than “merged with a view to increasing the apparent tangible asset worth” which could give a misleading indication of value. The Enterprise Inns Accounts tell us the Estate is worth £5.9 billion and each of the 7,763 pubs are worth an average of £755,000. 7763 multiplied by 755,000 is £5.86 billion, almost £39 MILLION shy of the quoted £5.9 billion. The average rent of each pub is £33,235 per annum. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 142 Business and Enterprise Committee: Evidence

Beer Tie Removed

Q291 Mr Wright: What would be the eVect if the beer tie were removed?

Mr Thorley: I have already said that, sadly, there would be some international brewers no longer UK- based, and remember that 80% of our beer sales in the UK are still controlled by four major operators all of whom are foreign organisations, Evidence has already been submitted proving that the largest shareholders in the Punch and Enterprise Inns are European banks and US Pensions Funds. Like it or not both Pubco’s are eVectively foreign organisations. Over the previous 10-15 years the huge profits derived at the expense of British pubs has gone overseas in the form of dividend payouts. Punch and Enterprise Inns shares have lost 93% and 87% of their value over the past 12 months respectively. Sadly had the profits been channelled back into the pubs, in the form of more reasonable rents and passing on the beer and product discounts, many pubs would still be open and all would be in a better state of repair and condition as the tenants would have reserve capital to invest in the building. There has been no inward investment into pubs for years.

and they would simply redirect their eVorts into oV-trade promotions, their marketing eVorts, and you would see a significant reduction in the amount of inward investment into pubs by the pub companies because we would have no incentive and we would have no connection with the trade of the pub anymore. As I said earlier, the benefit of the wet rent, as some people have called it, is that it gives us an immediate indicator of the performance of the pub and we get an immediate change in our income streams, not something that can be changed on a monthly, quarterly or annual basis in the same way as the rents; it is very much more flexible.

Mr Tuppen: We are often accused of just being property companies. The reality is that we have a total interest in the performance of the pub, so we invest in its success and we want it to be successful so that it can sell more beer and we can all make more profit. Were the tie to be removed, we would indeed become just straightforward property companies and, for a start, one would not see anything like the £9 million of support that we gave to our licensees in the past year. That would be the £9 million to the 1,453 pubs that Enterprise Inns acknowledged needed assistance. It sounds like a lot but amounts to an average of approximately £17 per day (yes you read it right SEVENTEEN POUNDS). Hardly a rescue package!

, and Giles gave similar amounts. We have an interest in the success of the pub that is exactly aligned with those of our licensees and, whilst that has been under attack recently by people who would like to see the agreements to which they signed up changed, the reality is that we see this as something that is for the long- term benefit of pubs in this country. The reality also is that, if the tie were removed, there would be even more pub closures and there would be a significant reduction in choice for the consumer. I remain confused. Mr. Thorley and Mr. Tuppen have outlined the advantages/benefits that we, the tenants, would lose if the tie were removed in Q212 (look carefully in their witness sessions they amount to very little) 1. Punch tenants have a choice of over 280 beers, Enterprise 1312. There are thousands of cask ales alone add to that lagers and stouts and with no tie the tenants and customers would have a far greater choice 2. Area managers, as previously outlined, are of little benefit to tenants and are generally seen as nothing more than glorified rent collectors 3. the lack of Arbitration and Independent Expert cases reflects the huge costs and risks to the tenant not a fairness in rents 4. training (which incidentally tenants still have to pay for) 5. a free rateable value appeal service (which we rather cynically consider is just an excuse to view tenants accounts so we never use) 6. We, at the Eagle Ale House, have been oVered no other products or services by Enterprise Inns that we can not acquire, considerably cheaper, on the open market. If the tie were removed and the price were so favourable then tenants would maintain a the supply arrangement with the Pubco. If the tie were removed I do not doubt the Pubco’s would be in serious financial trouble. However, tenants would continue to undertake training they consider necessary at their own expense, would have to pay for rating advice if they considered it necessary (a five yearly nominal expenditure), would continue to buy on tied products from existing suppliers not related to the Pubco’s and be able to oVer a greater selection of beers at a lower price to the customer whilst still maintaining the same profit margin or better. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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What the Committee need to ask themselves is:

Do you wish to save the British Pub or the Pubco?

Save the Pubco and sooner or later you will lose both! 5 January 2009

Further supplementary evidence from Simon Clarke, Eagle Ale House

BRULINES DEMONSTRATION

Introduction In view of the tie arrangements of the lease most Pubco tenants are obliged to purchase their beer from their Pubco landlord. In order to “police” this obligation most Pubco’s use “Brulines” as a tool to monitor the amount of beer dispensed by their tenants, this figure is then checked against the beer delivered to ensure the DELIVERED and DISPENSED beers “tally”. The diVerence between any dispensed and delivered figures is called the VARIANCE. It is inevitable that there will be a degree of variation between the delivery and dispense figures as, for example, 10, 9 gallon, barrels of cask beer may have been delivered today that have not yet been dispensed, this would create a POSITIVE VARIANCE of 10 barrels (or 90 gallons on their charts). As the beer is dispensed the variance should revert back to nil, until the next delivery and so on. That is the principle, there are overlaps in delivery and dispense and therefore the variance fluctuates, so depending on the analysis period, the variance could be positive or negative and in fact should vary between the two. The Pubco’s seem to consider that when ever a large negative variance occurs (or a negative variance accumulates) the tenant must have bought beer outside the tie obligations of the lease thereby dispensing more than that delivered.

The Eagle We were told, by Brulines and our landlord Enterprise Inns, that Brulines is an accurate flow metering system—it follows that, on the basis we are not buying outside the tie obligations of our lease our variance should be around “0”, given we take delivery of an average of around 265 gallons a week our variance should not be much more than than 265, ever. Currently, our Variance is almost 2,000 gallons (! ie more delivered than dispensed) over the last 12 months. To put it in perspective that is around 220 of the barrels you are about to see in our cellar.

The Monitor Simply a water wheel with an electro magnetic switch—remember physics iron filings magnet?

Charts Typical weekly chart from Brulines (not openly available to tenants unless they ask) NB Taken over an 18 week period. If we go on line and look at our actual figures (live) we can input the analysis period to 12 months showing over 2,000 gallons positive variance—the implication being we are “stockpiling” beer or possibly selling it wholesale at a mark up on Pubco price! Also included in the weekly reports is a “Hotspot” report advising us of when we were busy the week before! What is useful is that Brulines highlight in blue the occasions they believe we have cleaned a beer line. NOTE charts show 4 pints of water and over 72 pints in a barrel and note over 72 pints in a barrel Lines 10 and 11 (not printed here).

Line Cleaning Obviously when cleaning a line you would not pull through one or two pints it would be around 20–30 pints. Brulines “guess” that when 20–30 pints are pulled through in rapid succession (in a small time frame) it must be line cleaning. With cask ales lines they have no way of monitoring line cleaner or water other than this guesstimate. DEMONSTRATE CLEANING. Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 144 Business and Enterprise Committee: Evidence

With keg beers (lager, Guinness etc) they have a monitor on the water line and beer line. The beer line monitor measures ALL dispense, the water line monitor ONLY water, the theory is that

ALL dispensed " water dispensed % beer dispensed If the system is accurate why do we now have such a large positive variance on keg products as well as cask? 11 March 2009

OPEN MARKET RENTAL VALUE—EAGLE SW11 6HG AS AT 10/05/2006

WITHOUT PREJUDICE

Income Liquor 404 barrels * £1,089 £439,956w 54.0% £237,576 Food & Catering £500w 50.0% £250 Letting income £0w 0.0% £0 Total Turnover £440,456 Machines £5,000 £5,000 Gross Profit £243,076 Costs 28.3% of Turnover £124,730

£124,730 Net Profit Before Rent £118,346 Rent Bid (per annum) w50% £59,173 13.28% Rent to turnover

Wages £54,800 12.44% Food Sales Meals Crisps Entertainment £5,000 £0 £500 Entertainment £5,000 Heat & Light £16,500 Rates £8,800 Insurance £5,000 Cellar Cooling £530 Repairs £8,000 Sundries £13,000 Licensing £7,600 Accountant £5,500 TOTAL £124,730 28.32%

OPEN MARKET RENTAL VALUE—EAGLE WITHOUT PREJUDICE

Income Liquor 388 barrels * £890 £345,320w 56% £193,379 Food & Catering £6,000w 50% £3,000 Letting income £0w 0% £0 Total Turnover £351,320 Gross Profit £296,379 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 145

Costs £86,400

£86,400 Net Profit Before Rent £109,979 Rent Bid (per annum) w50% £54,990

Further supplementary memorandum submitted by Simon Clarke As promised here is the relevant information you requested regarding the “costs” allocated to the rent calculation for rent reviews. You will recall that estimated turnover or FMT (Fair Maintainable Trade) is the starting point for the calculation. An appropriate Gross Profit (GP) and cost deduction is applied to FMT leaving a Divisible Balance, which is split 50:50 landlord and tenant (the landlords bit being annual rent, the tenants being his wage for the year). With the weight of evidence, I sense some of the Committee might be having a spot of trouble getting their head round how this calculation can go so badly wrong. Quite simply it is a tool—used well (impartially) it works, used badly (abused) and the rental result can cripple a business. So, using easy numbers, I have outlined the calculation below:

FMT say (net of Vat) £250,000 GP say 50% of FMT (assuming a part tied pub) £125,000 less Costs say 35% of FMT (assuming drinks only pub—no food) £87,500 Equals Divisible Balance (DB) £37,500 Rent (at 50% of DB) £18,750

Clearly, the higher the costs the lower the divisible balance, and therefore the rent. Enterprise Inns have 7,763 tied pubs, some on “open book accounting” they must have a pretty good idea by now of the likely costs incurred by the tenant as a percentage of turnover. You will see from Calculation 1 (attached), the first rent calculation from Enterprise Inns of their proposed rent at review (£59,173), that they estimated costs at 28.3%, later they reduced their rent proposal to £54,990 (Calculation 2—attached), the costs now representing 24.6% of FMT, regardless of whether I agree with the percentage used why should it change? Incidentally, the Arbitrator Awarded that costs should represent 33% of FMT. If FMT and GP remained the same and the Arbitrators awarded “costs” (ie 33%) had been included in the second Enterprise Inns calculation, the rent would have been £40,222, I oVered £41,000 before Arbitration! It is not just costs Enterprise Inns manipulate. You will also note that in Calculation 1 they have an income of £5,000 for “Machines” and £500 for “Food and Catering” (being crisps and snacks), when I pointed out we have no machines they “adjusted” this for Calculation 2. There was no longer any machine income but our Food and Catering Income has gone up 1,200% to £6,000. If the cost percentage is too low then the Divisible Balance is falsely high, the landlord gets a higher rent the tenant less profit. Using the simple calculation above, for every 1% the costs are too low the landlord gains £1,250 the tenant loses the same. So if the costs are set at 30%, but should have been 35%, the rent would be £25,000 and the tenants profit only £12,500. (I have this on a spreadsheet on my computer which I can show you or send you—all you have to do is alter the costs percentage to see the diVerence). My point is that Enterprise Inns continually manipulated the costs and other variables to support a desired rental figure. Rather than input appropriate variables to determine a rental level, they worked backwards from a sought after rent until the calculation fits their requirements. I should add that the attached calculations are as they were emailed to us with no amendment, note that in Calculation 2 they have neglected to represent costs as a percentage. Also note there is no supporting evidence for any of the variables. Despite requesting evidence, 13 times in writing, Enterprise Inns never supplied it and preferred to allow the matter to proceed to Arbitration, an extremely oV putting resort for most tenants due to the cost implications. 5 January 2009 Processed: 08-05-2009 02:35:59 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 146 Business and Enterprise Committee: Evidence

Memorandum submitted by the British Association of Pool Table Operators (BAPTO)

REVIEW OF THE T&ISC REPORT INTO PUBCO 2004 BACTA is a long established (1975) trade association representing suppliers of coin operated Pool tables, Juke boxes, AWP machines etc. We gave written evidence to the original Trade & Industry Select Committee (TISC) in 2004. We are making this submission on the assumption the committees purpose is to look into what action has been taken by the pubcos following the recommendations made by the TISC in December 2004, we therefore feel there is no reason to re-run the arguments that led to that committees recommendations, the recommendation that concerns us is recommendation 19 (paragraph 129) that reads as follows: The machine tie improves tenants’ takings from amusement with prizes machines (AWP). However, as free of machine tie tenants retain 100% of these takings as income, while tied tenants by pubcos own admission receive an average 50% of these takings, it appears from the information the pubcos themselves submitted that in many cases free of tie tenants make more money from their second tier machines than tied tenants do from their more up-to-date models. In our opinion, pubcos do not add suYcient extra value from their deals to justify their claims to 50% of the takings from AWP machines. We remain unconvinced that the benefits of the AWP machine tie outweigh the income tenants forgo and we recommend that the AWP machine tie be removed. Our hope is to see this recommendation made mandatory. We are however alarmed that you state when announcing the new inquiry “in 2004 the T&ISC published a report in which most notably it concluded that” you then list five points and do not even mention the removal of the “machine tie” which was probably the strongest recommendation the TISC made it was totally unambiguous. We recommend that the AWP machine tie be removed. We hope in your deliberations you give this subject the importance it deserves and do not sweep it under the carpet. We give the following examples to support our case.

1. The Pubcos have Actually Increased the Royalties they take from Machine Suppliers The pubcos as opposed to having removed royalty payments have in actual fact increased the level of these payments as follows:

2004 2008 Punch Taverns £11.00 per Week per Machine £16.00 per Week per Machine Enterprise Inns £22.00 per Week per Machine £24.00 per Week per Machine

2. The Pubcos now take a Bigger % of AWP Takings than they did in 2004

2004 Machine taking £100.00 per week after outgoings is divided as follows £22.00 Royalty (from machine supplier) to pubcos and £50.00 each to the pubco and licensee. But then the licensee share is put in to the rental calculation and the pubco takes a further 50% cut.Total machine income £122.00 (Inc £22.00 Royalty) The pubco gets £97.00 (£22.00 royalty ! £50.00 ! £25.00 in rent) % £79.6% of takings to pubco

2008 But by 2008 the machine take has fallen by 30% but the royalty has increased to £24.00 per week machine now taking £70.00 per week and is divided as follows £24.00 royalty (from machine supplier) to pubco and £35.00 each to the pubco and licensee but then the licensee share is put into the rental calculation and the pubco takes a further 50% from the licensee share & RPI, Total machine income £94.00 (Inc £24.00 royalty) The pubcos gets £86.00 (£24.00 royalty ! £35.00 ! £27.00 in rent after PRI) % 91.4% of taking to pubco

3. More Pubcos than ever Apply a Machine Tie The machine tie is now employed by almost all pubcos large and small across the full range of amusement equipment to be found in pubs. All these pubcos realise it is the easiest way to increase the pubcos income at the expense of their tenants and the “approved suppliers” are willing accomplices. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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4. What Value is Added to Ancillary Equipment by the Pubcos The pubcos defence for retaining the machine tie is they “add value” to AWP machine takings. What value do they add to Pool Tables, Juke Boxes, S.W.P’s to which they still apply the machine tie and take royalties and a share of the cash box. The money they take from these machines is totally at the expense of the tenants for no benefits at all to those tenants.

5. The Cost of Maintaining Machine Tie There is an whole tier of beaurocracy that has to be financed to operate the machine tie, these include machine directors, MVM’s (machine vending managers) outside companies to whom the machine suppliers returns are sent, amusement machine suppliers have to employ staV to prepare the paperwork to be sent to the companies, this whole raft of expense which would add up to millions of pounds a year has come from cash boxes of the machines, a large proportion of this money should be going to pubco tenants not into the profits of the pubcos if this was not the case more tenants might be able to survive in their pubs and maybe make a profit.

Conclusion Publicans of all descriptions are feeling the eVects of the current financial climate and many are struggling to survive, BAPTO members see many pubs closing most of them pubs owned by pubcos. We are not suggesting that the ending of the machine tie would prevent all these closures but it would certainly make a big diVerence to many tenants. The main beneficiaries of the present system are the pubcos who by one means or another are taking up to 90% of AWP machine takings (as shown in previous examples) and the small number of machine operators who now supply the pubcos (approximately 15 % of all potential suppliers). The main losers in the system are the pubco tenants and the 85% of amusement machine suppliers who are denied access to this market. The people who would benefit most from the ending of the machine tie would be the pubco tenants and they are the ones who need to benefit most. For some tenants the removal of the machine tie could make the diVerence between carrying on and “throwing the keys in”. The only people in the amusement machine industry that support the machine tie are people and companies that have historically earned their living from the system as it is. The issue of the machine supply to pubco tenants should be conducted between two parties the machine supplier and the tenant not involving a third party (the pubco) who’s intent is to obtain as much money from the transaction as is possible. The pubco will do everything in their power to maintain the machine tie no matter how many millions of pounds it would cost. This fact alone illustrates the value of the machine tie to the pubco. There will undoubtedly be a temptation for the committee to fudge the machine tie issue but if the committee fail to end the machine tie they will be failing in their duty. The final comment can be left to the TISC chairman Martin O’Neill. Committee chairman Martin O’Neill was suYciently moved to say “that the issue of machine income was the last blatant example of the profiteering that had been common place amoung pub landlord companies historically”. January 2009

Supplementary evidence from BAPTO Following the oral evidence given to your Committee on Tuesday 9 December by Mr Bob Hayward, Mr Nick Bish, Mr John McNamara, Mr Giles Thorley, Mr Giles Kendall, Mr Ted Tuppen and Mr Simon Townsend, we would like to make some observations on replies given by them to questions posed by members of your Committee relating to gaming machines and the machine tie. We enclose the relevant questions and our observations (not printed here). We also enclose the relevant pubco machine rent schedules and independent information as to what rent pubco tenants/lessees should be paying for their gaming machines. This documentation proves that pubco tenants/lessees are paying substantially more rent for their machines than the free of tie landlords as well as the pubco having 50% of the net takings and taking into account the tenants share in the rental calculations. The pubco involvement in the supply of amusement equipment via the “approved operator” system also drives up the rent pubco tenants/lessees pay for all their ancillary equipment ie. pool tables, quizzes, digi juke boxes. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 148 Business and Enterprise Committee: Evidence

We are sorry for being so late in making this submission, there was a delay in getting some of the evidence together. Q181 Mr Bish speaks for his members many of whom are pubco tenants/lessees and are the victims of the machine tie and realise the unfairness of the situation they are in. However Mr Bish underestimates the amount the pubcos actually take from the fruit machine, after taking into account RPI in the rent calculation the pubco ends up with over 90% of the fruit machine takings. BAPTO gave illustration how this works out in our original submission. Q182 Mr Hayward comments the pubcos have experts on fruit machines, this is rubbish, the real experts on fruit machines are the players (the pub customer) if a fruit machine takes money over a period of time its good, if it doesn’t its bad, it’s as simple as that. Operating amusement equipment is not rocket science it is common sense. I feel qualified to pass this comment as I have operated amusement equipment successfully for the past 35 years. Most pubco tenant/lessees would be more than capable of managing the amusement equipment on their premises. The comments made by Mr Bish on the diVerences on the rents of fruit machines is easily explained by the amount of the “royalty payment” demanded by the pubco, this amount could easily vary from pubco to pubco by as much as £16.50 per week, per machine. Q183 That is exactly what the pubcos do they tell their tenants/lessees who will supply them with amusement equipment, in most cases with no consultation whatever. Punch Taverns recently entered into an agreement with Sceptre Leisure to supply amusement equipment to 30% of Punch Taverns estate. How do Punch Taverns know that 30% of their tenants want to be supplied by Sceptre Leisure? They don’t, but the supplier will be imposed on them anyway because it suits the pubco. These tenants want to be independent businessmen running their own businesses and making their own decisions, not being told who supplies them and on what terms. The tenants are capable of making these decisions themselves. Q185 Enterprise Inns and Punch Taverns expect to make £25 million each from machine income in 2008 the same as they did in 2007 it is interesting at a time when machine income is down the pubco income remains the same, this is achieved by taking a bigger percentage oV more machines (ie juke boxes, quizzes, pool tables etc) at the expense of their tenants/lessees.

Punch Taverns plc Compare 2007 with 2008

Punch financial report shows: 2007 2008 Total awp 25m 25m

Enterprise Inns plc Comparison of 2007 Results with 2008 Total awp 25m 25m Q188 The BBPA and Punch Taverns did in fact make representations to government on the issue of gaming machine stakes and prizes, however the attached list shows that they were by no means on their own and should not be claiming too much credit for whatever is achieved. Q212 It is interesting that Mr Tuppen goes out of his way to mention one recommendation of the 2004 TISC but chooses to ignore what is probably the strongest recommendation of that committee, “we recommend that the AWP tie be removed” Q290 It would be interesting to know if during his time as club secretary Mr Wright had any diYculty finding a suitable amusement machine supplier and what was his experience of being a “Free of Tie” landlord with respect to machine supply. Q298 Mr Thorley claims that Punch Taverns tenants pay less rent for top of the range fruit machines than free of tie landlords. The enclosed price lists prove that Punch Taverns tenants pay between £19.98 and £21.98 more per week for the same machines and Enterprise Inns tenants pay between £20.94 and £23.94 more per week for the same machines. Mr Thorley was equally confused and peddled the same lies to the 2004 TISC inquiry as the following extract from his evidence shows. Q553 Sir Robert Smith: You have mentioned already that you take a 50/50 share of profits from the slot machines. Do you take any royalties from machine companies for allowing them to put machines in? Mr Thorley: We use it to subsidise the rent. The rent in our estate has gone down by seven percent in the last two years as we have negotiated better terms. Because there are reasonable good statistics on the machines. Q554 Sir Robert Smith: Sorry, do you charge? Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Mr Thorley: To the extent we get royalties I am not entirely sure because there are a large number of diVerent suppliers and each contract will be subtly diVerent. We have used it to reduce the levels of rent. I can give you some statistics but the levels of rent we charge for machines are materially lower than are available in the free trade and we can give examples of that. Moreover they have fallen I think by seven per cent in the last year. The enclosed rent lists (not printed here) cover the period December 2008 to January 2009. The AWP directory (which covers the same period as the rent list) is an independent publication available to licencees to inform them of the quality, date of manufacture and rent they should expect to pay to their machine supplier if they negotiate the terms themselves. 7 January 2009

Memorandum submitted by the Federation of Small Businesses

Introduction 1. In towns and villages across the UK small businesses and local shops face closure. Our high streets face extinction. 42% of English towns and villages no longer have a shop of any kind.16 As many as 27 pubs are closing every week.17 When the FSB submitted evidence to the then Trade and Industry Select Committee in 2004 we had 3,135 publican members, today this number is down to 1,473. It is worth noting that the FSB as an organisation has in the same time grown with around 35.000 members. This shattering trend must be halted and the first step to achieving that, the FSB believes, is to abolish the Pubco tie. Pubs are not just a part of the local community, in many places they are the local community. They generate employment, growth of the local economy and an opportunity for people to meet and make communities stronger. They are in many ways the glue that binds our local communities together. One FSB members put his frustration in words by saying: Pubcos and the government combined are rapidly destroying a significant element of British heritage.18

2. Background 3. The concern with Pubcos and their relationship with publicans is not a new issue for the FSB. In 2004, the FSB played an instrumental role in the then Trade and Industry Select Committee inquiry into the relationship between Pubcos and their tenants. It is evident that the situation for publicans, despite the 2004 recommendations, by and large remains the same. Therefore the FSB welcomes the re-launch of the Pubco Inquiry by the Business and Enterprise Select Committee. In advance of submitting written evidence, the FSB conducted a poll asking our members what they thought of the current situation and whether they felt their situation in relation to their Pubco had improved since 2004. 99% of the 156 members that responded said it had not, and that they were in exactly the same situation then and now.

Key Issues The issues that remain of specific concern for the FSB are the beer tie and its eVects on tenants; rents and the way they are calculated; Pubco margins and the discrepancy in price from wholesalers; the level of support Pubcos oVer their tenants and last but not least the beer tie as business model for the pub trade. Each of these issues is outlined below with comments and quotes from the respondents to our poll. The exclusive purchasing obligations enforced by Pubcos on their tenants remain of great concern to the FSB. In our poll 96% of respondents supported a complete removal of the tie as they felt that would make the market fairer. One respondent said that: “Not being tied on beer prices would allow us to sell to our customers at a more competitive price and still make a realistic margin. Better price would increase sales and benefit everyone.”19

16 All Party Parliamentary Small Shops Group report: High Street Britain: 2015 17 http://www.fairpint.org.uk/index.html 18 FSB Member 19 FSB Member Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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The way the rents are calculated is still perceived as unfair by respondents, despite the 2004 recommendation of a code of practice. The discrepancy between the wholesale beer prices charged by Pubcos and the rents they charged their tenants is evident to see. One member said: “Either remove the tie altogether and review rent or reduce the inflated charges (over £100 more a barrel than one can get out of tie). Just give us a chance to make our business work.”20 One suggestion was that all rents should be set by arbitration and be dependent on how well the business is going. “The tie could be removed but any losses on the Pubco would have to be passed on in increased rents. However it would free up the brewing market and may lead to more stable prices if Pubcos passed on half the discounts to tenants we would have a better chance.”21 So far Pubcos have failed to acknowledge and adjust for local, regional and national trends in volumes when calculating the rents and this has led to excessive turnover projections. In addition Pubcos generally ignore the recommended use of accounting standards resulting in profits being exaggerated, and excessive rents demanded. One FSB Member remarked: “The Pubcos have all the power and can force ridiculous unjustified rents on the publican. It is immoral and unfair in the extreme.”22 The Pubcos’ margins with regard to the prices paid by Pubcos to breweries and those they charge to their tenants is another major area of concern. The perception is that the tied market remains unfair because tied publicans have no choice to make their own decision and to maximise their own profit. It is not unusual that tied landlords pay up to double the price for beer and cider than they would if they were buying on a free market. Another member continued: “Pubcos tie in landlords and charge them roughly 1/3 more for beer than the standard wholesale price. There are no benefits as they give nothing in return and even charge for promotional items where breweries give these free when[you buy] wholesale.”23 Another member said: “Pub companies have the industry in a far worse stranglehold than the brewers ever did. At least the brewers had an interest in selling beer, rather in the Pubco’s obsession with “maximising property return”.24 The chart below, which further illustrates the problem, was submitted to the FSB as part of the poll. The FSB member is a leaseholder free of tie on wines and spirits who has for the last 10 months been charged by Punch as column A. Due to his present financial diYculties Punch had agreed to charge what they call their “wholesale price” (column B). Included are two other suppliers, as reference, which he is unable to use as he is tied on Beer, Cider and soft drinks.25

ABC D Punch £ Punch £ Booker £ Waverley TBS £ 11gallon keg Lease Wholesale Wholesaler A Wholesaler B Guinness 123.59 115.21 94.79 91.90 Dry Blackthorn Cider 112.46 67.89 67.37 Fosters Lager 115.21 100.01 77.99 75.25 Kronenbourg Lager 132.03 114.21 89.19 93.17

The disproportion between the wholesale price and what Pubcos change is clear. Even with the discount from Punch the tenant in the above example could have paid up to £23.31 less for a keg of Guinness, had he been able to buy it from a supplier of his choice. Another FSB member said: “Having to pay anywhere between 20 and 30 pound a barrel more because you are tied is a serious amount of money per annum. Ties should be removed and rents capped to help all struggling licensees.”26 In those cases where tenants are struggling there still seem to be little help at hand. The recommendations that were made following the 2004 Pubco inquiry, which stated that the business support that Pubcos oVer licensees far outweighs the restriction of the tie, seem wholly inadequate. Respondents to the poll said almost exclusively that the business support they receive is only tinkering on the edges and does not help them in any meaningful way. One member said:

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“We are in financial diYculty and enterprise answer was to give rent discount but make us total tie. This to me is giving with one hand and taking from the other!27 “Although Pubcos say there is help for pubs that are struggling, this is not true. We do not get our beer etc at discount prices if we are doing well. We are tied to Everards brewery and although we are very happy to stock and sell products purchased via them I would like partial free of tie on non Everards brewed products.”28 Another Member said that it is clear that: “Pubcos responsibility lies with their shareholders, at the expense of the pub industry, licensees, brewers and the public.”29 The beer tie clearly poses a burden on licensees and the FSB questions whether this is an appropriate business model for the pub trade. Four years have passed since the last inquiry and our members still feel a great sense of unfairness. One respondent, who felt very privileged to be running a free house, said that personally she would never enter into a business relationship with a Pubco because of their approach and attitude towards their tenants. Other respondents said: “I am a licensee at a free house; I have a free house because I refused to be ripped oV by these Pubcos. They prey on inexperienced people who have never run a pub before that don’t know the trade and rip them oV.”30 “We are a free house so this is not appropriate. However I would never work for a Pubco for any amount of money as they simply rip oV leaseholders.”31

Conclusion The above evidence had led the FSB to believe that the only viable solution resulting in a fairer deal for pub tenants is a complete removal of the tie. This has the significant support of 94% of respondents to our poll. One respondent said: “I would rather pay more rent and have no tie to products, leaving us free to shop around for the best prices.”32 The amount of pub closures speaks for itself, 27 pubs per week are closing down and FSB members give testimony upon testimony how diYcult it is to survive in the pub business today. One FSB member said: “Pubcos tie you in to almost everything, your average landlord cannot make any kind of profit if you what to stay competitive. In a lot of cases the landlord will find themselves bankrupt within five to seven years, because of the greed of Pubcos.”33 The FSB believes that if the ties were eradicated this would create a level playing field to enable pub landlords to compete with those who are not tied. As it is in the current situation it is impossible for tied tenants to compete with the free houses. One respondent said: “The sooner the better before it is too late for the majority of landlords. All publicans need help because of high prices.”34 It has been suggested that an alternative to abolishing the tie would be for tenants to leave their pubs altogether. If more tenants refused to take on a tied lease, the Pubcos would eventually have to sell their pubs. As it would be impossible for Punch Taverns, for example, to service a £4bn loan with no pubs let. The message is simple. The relationship between Pubcos and landlords is not sustainable and the tie has to go one way or another. One respondent to our poll put it in a simple sentence; “Why should I have to buy my beer from Enterprise when they do not produce beer?”35

Keep Trade Local The FSB is currently running a campaign called Keep Trade Local which seeks to stem the tide of small business closures. The Keep Trade Local campaign is however not only for small retailers, it also incorporates post oYces, pharmacies, pubs and all the other independent trades and businesses, that together represent the rich fabric of our society and the bed rock of a stable economy.One FSB member said:

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“Current Pubco policies are completely destroying the Pub business. This present government has out taxed the on trade to give the breweries and the supermarkets the monopolies from rural village to the high street. Look at any town or city and count the independents.”36

Summary of FSB’s Recommendations — Complete removal of the tie. There is enough proof that the tie does not work as an eYcient business model for the pub trade. — Annual indexed rent increases to be stopped and the practice of upward only rent reviews terminated. — Introduce a greater transparency in the rent review process and make paragraphs 144 and 145 in the 2004 Trade and Industry Report enforceable by statute as the FSB believes the voluntary code has not worked. 29 September 2008

Memorandum submitted by the OSO Pub Company

1. Introduction 1.1 Founded in 2003, The OSO Pub Company is owned by its three directors—Alison Oxford, Mike Smith and Nigel Oxford. All three have past and varied experience in the food industry in particular in the Catering, Hospitality and Supply sectors. (Brief CVs for the founders are contained in the supplementary appendix A). 1.2 The company presently leases and operates just one pub, the Three Compasses, in Hornsey, North London and has done so since December 2003. Avebury Taverns Limited originally granted the 25-year lease, however, in 2005 Avebury Taverns Limited was acquired by Punch Taverns plc who are now our landlords. 1.3 We believe we are competent and responsible operators evidenced by the numerous awards that have been won by the Three Compasses including: UK’s Best Community Pub 2006 & 2008, London’s Best Tenanted/Leased Pub, Best Newcomer awards and Punch Shine Awards for both Community and Customer Experience. 1.4 Our time running the Three Compasses correlates quite closely with the period between the original 2004Trade and Industry Committee report on Pubcos and the new Business and Enterprise Committee inquiry. In this submission we try to relate our experiences of running a “Tied-Lease” Pub to the previous conclusions and the new questions raised by BEC inquiry revisiting the role of Pubcos.

2. “No one Pubco holds a dominant position in the market” 2.1 From an end-consumer point of view or “market”, this would seem to be true. There are still some 55,000! pubs in the UK with approximately half controlled by three or four large Pubcos. Many of these are operated by individuals or companies such as ourselves so distinction and choice are (on the surface at least) still available to the end-consumer. 2.2 In the market for freehold public houses (ie the “bricks and mortar”) then the Pubcos have a much more dominant position. The freehold prices of public houses have greatly increased as Pubcos utilize their super-normal profits to increase their property estates and out-bid smaller rivals. Business Development Managers (BDMs) are targeted to find economically viable properties to purchase and “bounties” are oVered to anyone who can suggest a suitable property. Their grip is further tightened when properties considered to be unviable are sold oV with restrictive covenants forbidding the future sale of alcohol at those premises. 2.3 In the wholesale beer market the Pubcos are again dominant primarily due to the beer tie. Fifty percent of the UK market is unavailable to non-Pubco wholesalers and that same 50% has none of the usual commercial powers to resist price rises and range changes or to influence service levels imposed by the Pubcos. Our Pubco has recently told us that a brewery has raised its prices for a second time this year and no longer produces an 18 gallon cask of its product and we must use the less economic 9 gallon cask. Our source at the brewery tells us that neither of these “facts” is true. 2.4 A worrying development is the increase in “all product ties” now appearing in new leases, giving Pubcos ties supply of spirits, wines, soft drinks, etc. Coupled with this is the recent move by at least one Pubco to acquire a 50% interest in one of the major independent beer, spirit and wine wholesalers.

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3. “Small brewers may be disadvantaged by the requirements set by Pubcos” 3.1 In our experience this is certainly the case. We have met a lot of resistance to our use of the SIBA direct delivery scheme that we started when still a tenant of Avebury Taverns and which is not generally available to Punch tenants. Punch restricts the choice of beers available to us through the SIBA scheme by not allowing these small brewers to include their seasonal beers. Some beers from other small breweries are available through Punch’s own “Finest Cask” scheme but only on a three-month rotational basis and only when we meet stringent requirements for minimum orders and long lead times. 3.2 Even brands from the big brewers can be diYcult to obtain if their price negotiations falter—brands can be changed or withdrawn with no regard to the eVect on the tied retailers’ business or their customers’ preferences. 3.3 Both the big brewers and the smaller brewers are limited in their marketing and promotional activities by the Pubcos. Representatives and salesmen from the brewers are barred from talking directly to the tied retailers and promotional materials usually made available to the retailer for free by the brewers are collected centrally by the Pubcos and then sold to tied retailers. We have numerous examples of representatives refusing to discuss business developments, changes to our range, etc because they have been “warned oV” by the Pubco.

4. “The cost of “beer ties” are usually balanced by the benefits available to tenants” 4.1 Not in our experience. As previously mentioned, our lease was originally with Avebury Taverns one of the smaller Pubcos with about 700 outlets. We consciously avoided the larger Pubcos and were aware of the drawbacks of a tied lease. However, we believed at the time that these could be, at least partly, compensated by other considerations. For example, we obtained our lease without paying a premium, we were granted a staged increase in rental payments in the early days of the lease and Avebury contributed towards some of the refurbishment costs. This meant that our start up costs were lower with a tied lease than say a freehold or a free of tie lease. (Although freehold and free of tie lease pubs were few and far between in 2003 so the options were fairly limited—which is still the case today). We were probably lucky in that we chose a small Pubco so could negotiate at director level, the Three Compasses was in a dilapidated state and was probably considered to be non-viable and Avebury (unbeknown to us) was preparing itself for market and needed some “showcase” operators. We believe these factors enabled us to obtain a better deal than is probably normal. 4.2 When Punch took over in 2005 the first eVect was to increase our beer prices by an average of 10%— much more in some cases—and not what we expected considering they had over ten times more outlets. (The letter informing us of the new prices explained how we would benefit from their greater buying power!). 4.3 Apart from our initial start up, we cannot appreciate any benefits from a beer tie that means we pay anything between 25% and 125% more for our beer. Punch oVer training courses but at a price, which is comparable to and in some cases greater than the prices in the open market. We have to pay for items (even down to drip mats) that would otherwise be free from the brewers. We have had little or no input from our various BDMs that would assist or improve our business. We are restricted in our dealings with Brewery representatives (we were recently told we could not take advantage of free training oVered by our spirits representative until Punch realised we are not tied for spirits). We have none of the usual levers to control service levels or changes to our product range. All Pubco invoices are paid by direct debit even when incorrect and credits can take months to be arranged. We received very little help through the recent licensing changes or the introduction of the smoking ban and such help as was available had to be paid for. Gaming machine suppliers have been changed arbitrarily even though we had carefully selected the type of machine we wished to install. 4.4 Is our rent below the market rate and so justifying the extra cost of the beer? After four years of annual RPI increases, our present rent is approximately £42,000 per year. Our conservative estimate of the extra we pay for our beer supply is approximately £46,000 per year. Has our basic rent really been set at less than 50% of the market rate? As a small, independent operator it is diYcult for us to absolutely sure but we believe we are probably paying anywhere between £15,000 and £25,000 more than the market rate. Our first rent review is due in December 2008 and will probably be an “interesting” experience. As an aside, Punch is already well behind the timetable it sets for itself for rent reviews in the “Punch Retail Charter” (based on the code of practice guidelines produced by the British Beer and Pub Association).

5. “Splitting the wholesaling and property functions of the Pubcos, by removing the beer tie, could lead to the national brewers having a virtual monopoly on the wholesaling of beer, as before the Beer Orders” 5.1 No it would not. Since the Beer Orders we eVectively swapped the large brewery controlled estates for large property company estates with an anti-competitive beer tie now in place across more outlets than was previously the case. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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5.2 With no tie at all or a very limited tie, we would be releasing some 30,000 outlets that would be free to change suppliers and operate all the usual commercial controls to ensure a competitive market. Times have changed since the Beer Orders and there are a number of “Brewery-free” Wholesalers operating in the market place as well as organisations such as the SIBA Direct Delivery scheme which did not exist before. 5.3 Conversely,at present most of the large Pubcos, if not all, outsource their distribution to the Breweries anyway so the situation is virtually the same as before the Beer Orders except that the profits go to the Pubcos not the brewers—probably the reason that the UK no longer has a brewer that can operate on an international scale.

6. “Has the Licensing Act 2003 had an eVect on competition within the market?” 6.1 Again, from an end-consumer’s point view the answer is probably yes. There is a greater range of opening hours and to some extent pubs can compete with other outlets such as nightclubs. 6.2 In the operating and supply sectors the competitive eVect has been minimal. It could be argued that longer hours have increased costs as similar levels of trade have been spread over a longer period. Giving licensing powers to local authorities and the corresponding increase in bureaucracy has definitely increased costs.

7. “To what extent have revisions to the framework codes of practice met the Committee’s concerns?” 7.1 The Punch Retail Charter (referred to at point 4.4 above) probably meets most of the committee’s concerns and similar publications exist for other Pubcos. However, in practice many of the DTI Select Committee’s recommendations have not been applied. 7.2 The Pubcos seem to have paid lip service to the Select Committee’s desire to see less control over non- core products such as gaming machines and are in fact extending their control in to areas such as: Telecoms Masts, ATM cash machines, dispense equipment and extension of the tie into spirits, soft drinks, wines, etc. Upward only rent increases and automatic annual RPI rent increases still exist in new leases although many now use terms such as “Market Rents” or “Market Values”. Gaming Machine ties are specifically referred to in the Punch Charter.

8. “To what extent are the codes applied by the Pubcos” 8.1 See point 7 above.

9. “Is there a need for further regulation of the industry” 9.1 Perhaps regulation or legislation is required to enforce the recommendations of the previous Committee. After four years there are plenty of glossy brochures but very little action. 9.2 With regard to the Beer Tie—probably easiest and best of all—there should not be a Beer Tie. The wine, spirits and soft drinks industries all manage to grow and improve without a tie and the same is true for many, if not all, other aspects of the licensed trade. 9.3 If the Beer Tie is to continue it should at least be regulated to avoid potential abuse: 9.3.1 Greater access should be available to suppliers to maintain continuous market development and improvement. 9.3.2 Profits should be at normal levels and the benefits of being part of a tie should be shared amongst all participants in that tie. 9.3.3 Tied retailers need some “powers” to enable them to better manage service levels and price increases. 9.3.4 Ties for other aspects of the business should not be allowed (eg gaming machines, other product lines, etc.) 9.3.5 Pubcos should have to choose between operating managed houses or leases with ties—they should not be able to do both.

10. Some other observations 10.1 Most Pubco Leases claim that the Beer Tie is not contrary to EU competition laws since the rents charged are below the market rate as compensation for this. That the rents are below market rates has never been proved. However, even if this was to be the case, it is questionable that the EU expected the Pubcos to be compensated for the lower rents by making supernormal profits on all other aspects of their businesses whilst damaging the competitiveness and profitability of the other parts of the supply chain and leaving consumers with higher prices and a more limited market. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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10.2 Some large Pubcos have moved in to operating their own Managed Estates bringing them into direct competition with the tied retailers and using the enhanced bargaining power they get from that same tie to reduce their own supply costs.

10.3 Nearly all new Pubco leases attract a premium and many properties require substantial refurbishment. The argument that a tied lease is a lower cost way into the market is rapidly diminishing.

10.4 Pubcos argue that fewer tied lease pubs are closing compared to the freehold/free house sector. Certainly fewer close since the Pubcos appoint temporary or relief operators to keep the pub open whilst a new tenant is sought. The “churn” in lease premiums probably more than compensates for any lost rents and management cost. The real comparison should be the number of operators (ie tenants) who fail and have to leave the business. 29 September 2008

Memorandum submitted by Graham Brown

Rents—my niece and myself are Punch Taverns tenants and we have had a tortuous time* with them since we took on a lease nearly two years ago, not least the inability to get any information out of them regarding rent levels—and we have e-mails from our area manager stating that there are no figures on file or available anywhere else to say how the rent level was calculated. All we know is that we were told it was non negotiable and it is £20,000 per annum higher than the rental level set, on a free of tie basis, by the Valuation OYce in Wrexham—as an aside, we have to pay an annual fee for rateable value assessors who can appeal on our behalf to try to obtain lower Business Rate levels but when we enquired about starting this process Punch taverns advised us to be aware that the process could show valuations which would justify an increase in rent. I understand that the 2004 Trade & Industry Select Committee demanded clarity for the rent valuation process but this is clearly not the case with us.

Discounts—when we entered into the lease we were told we would have maximum (40%) discount on beers etc and the lease actually states that, due to their considerable buying power, Punch Taverns was able to oVer its tenants considerable discounts. In reality these “discounts” equate to our paying c£40 per barrel more than we would pay to a local supplier on a one-oV purchase. It would appear that the Pub Companies are using their purchasing power to increase profits rather than to benefit the tenants and, ultimately, the consumer. When we raised this with our Area Manager we were told that the prices were “subsiding rent levels”. Due to the present economic climate we have now been oVered further discounts for a limited period. We have also been oVered a rent reduction for six months but this is on the basis that we also buy spirits oV them—on asking why they were increasing the tie we were told that it was purely a “gentleman’s agreement” and wanted us to buy spirits oV them in recognition of the reduction.

Other costs—I am an independent Councillor on Powys County Council and, for the past five years, have been the Independent Deputy Chair of the LGA’s Safer Communities Board. In this role I gave evidence to the Les Elton Licensing Fees Review Panel. This panel included Francis Patton from Punch Taverns. My stance at these meetings, on behalf of local government, was to try to persuade the Panel that local authorities should be given the power to set fees locally rather than have them set by Central Government. However, there was the feeling that local authorities would “profiteer” and set fees higher than needed. Interestingly, in my personal business, we recently had a letter from Punch Taverns to say that they were changing the way in which they collected the Licence Renewal Fee and, when the first invoice arrived, it transpired that they are going to be charging us £334 per annum for a licence renewal fee of £195. Clearly, this pub company is going to be making money from their tenants—with a property portfolio of 8,500, if all tenants are having to pay the same amount of up-lift, Punch Taverns will be taking over a million pounds additional money from its tenants which, given the stance of the Elton Review Panel on which it was represented, raises some interesting questions! I re-iterate that I am writing this as a private individual and NOT representing the LGA.

Similarly, we have to pay Punch Taverns for property insurance. Following some wind damage to property in the beer garden I contacted PT to ask if the insurance covered it. I was told the insurance purely covered damage to the actual building. During this phone call I asked how come we were paying an annual premium of just over £1,600 for such a limited insurance cover (it is a small village pub and the premium should be more in the region of £500) and how had it been calculated. I was told that there was no specific calculation for each pub as HSBC just gave a global premium figure for the estate and this was then divided amongst the pubs. I have no evidence as I cannot get the information but, given the situation with the licence fees, I would not be surprised if the amount Punch Taverns collects from its tenants in premiums far exceeds what they pay themselves. Within the last few days we have just received a letter from Punch Taverns stating that, in order to save a rise in the cost of premiums to its tenants, it is raising the level of excess from £500 to £1,000 so only those that make a claim pay any extra. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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* I think this is outside the remit of the Select Committee but these include on-going problems arising out of refurbishment works carried out by Punch Taverns before we took over the lease such as the failure to obtain Building Regulations, the failure to provide the appropriate Certification and, of concern, the production of certificates previously unavailable, when the Health and Safety OYcers starting threatening to serve Notice.

Memorandum submitted by The Crown & the Town Hall Tavern I am writing to you regarding your enquiry into pubcos and would like to bring to your attention several issues we have had as an example of their conduct. I am the co-owner of two pubs (The Crown & Town Hall Tavern) both located in and both on a beer-only tied lease with Enterprise Inns PLC. We purchased the lease for The Crown in April 2006 & have gradually increased sales, despite the smoking ban and the general downturn in trade. In the summer of 2007 we were told that we would be getting a rent increase of around 50%, largely because the rent had been set too low for the previous tenant! There was no mention of this when we purchased the lease, and after lengthy discussions the rent was eventually increased by 50%. We managed to negotiate a rebate for the 1st year, but it is still a huge increase to impose in one hit. The pub is the bottom two floors of a block and as such, the pubco do not own the property but sub-let it. We assumed therefore, that the increase imposed on us was the result of a similar increase imposed on them but when asked, they declined to answer. We are unsure if this behaviour breaks any codes of conduct but, in our opinion, it is not a fair and responsible attitude and would perhaps suggest a need for further regulation of the industry.

We took over the Tavern in April 2007, but didn’t sign the lease until September 2007. The pub had been left in a terrible state by the previous occupant, and as a result the reputation of the pub had suVered badly.

Because of these problems, we were oVered the lease at a reduced price, though it may not have sold on the open market due to the poor condition and the fact that it wasn’t trading. However, we felt it had potential, and as the pubco had a vested interest in re-building the business, they would surely help if required. During the first year of trading we incurred losses of £50k but we received little or no practical help from Enterprise during this period, and haven’t done to this day. Eventually, we discovered by accident that we can apply for a rent rebate but of course, there are no guarantees though we are going through the process. In lieu of any practical help from the pubco and as owners, we have had to put over £50,000 into the Tavern, taken out personal loans and used personal credit cards in order to keep the business going.

The issue we have with the pubco is about the purchase of beer. We don’t get a discount at The Tavern, though we do for beer we buy at The Crown. We know we pay well over the odds for beer supplied on a tied lease basis, but as it is a tie we have no option. With a massive rent increase, heavy losses and no help forthcoming from the pubco, we had to reduce our costs wherever possible so we decided to buy all the beer for both pubs through the pub that got the discount. There is nothing in the terms and conditions of either lease about this—I expect it is not common for one operator to hold more than one lease at any one time. Lately, we have ordered some beer for the Tavern directly, losing whatever discount we were getting, but we felt that we should show willing and that we are prepared to compromise, though it is not reciprocated. We were quite open with Enterprise about what we were doing and why, but as a result, Enterprise have sent in inspectors to measure usage against purchases. Naturally, as we buy all the beer through one pub, the figures don’t match so the pubco has accused us of buying from an unauthorised source & tried to impose fines ranging from £720 to £4,000. At a meeting in April this year, we were told by the pubcos Area Rep that he was happy that the shortfall at one pub was adequately oVset by the over-ordering at the other, which is obviously the case. Yet, still we have inspection visits and receive invoices for fines for buying beer from an unauthorised source. As we have no beer in either pub from any other source than the pubco, we have absolutely no intention of paying these fines but are seeking legal advice and have contacted the OFT; if we are told that we are not in the wrong then we will defend our case all the way. We can only assume that this is simply a case of the pubco trying to claw back some of the discount they have had to give us by using bullying tactics or any means they can. I believe that it is not necessarily the tied lease which is the problem, but rather the way in which it is enforced by the pubco. It would appear that they have a relatively free reign to act as they please. If the tie is to remain, there should be an independent regulatory body to ensure the pubcos act in a fair and responsible manner and are accountable for their actions. 30 March 2009 Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by The Woolpack

Building This building, as are many in the estate, is in a deplorable condition. Landlords of rented buildings usually look after the fabric. This is not the case with Enterprise Inns pertaining to the public house. Examples are: — No hot water available on tap. — Rotting window frames. — Life expired upholstery. — Roof leaking. — Ad Infinitum. All this is deterring customers from coming in, ever mind returning.

Wet Sales,Costs Beverages must be purchased from the pubco, ie Enterprise Inns at vastly inflated prices. Wholesale barrel of beer at £54.99 And Enterprise barrel of beer at £92.44 Similar margins are in force for wines, spirits and non-alcoholic beverages.

Wet Sales,Supplies Currently, cash up front is required, making supplies very diYcult to come by. Deliveries from the pubco are very unreliable giving two options: Purchase through a wholesaler or travel to the depot to obtain the supply yourself requiring a round trip of 40 miles twice a week. Often an emergency delivery is required because of missed scheduled delivery. This incurs a cost of £45.00. If wet sales items are purchase wholesale, fines are levied seemingly out of all proportion to the cost diVerentials. An admisistration charge is imposed, £300.00 per pubco letter on the fine levy. (The banking ombudsman would have something to say about this amount). No discount is allowed on purchase through the pubco. No credit paid even though, supposedly allowed on supplied beer that is unfit for sale and therefore purpose. The above shows just how quickly a small pub tenant can mount up considerable debt to which the pubco is unsympathetic. The beer tie is supposed to allow a fair rent to be applied for the premises. This is not the case. Here a rent review depends on redecorating the public area for which funds are not available. Income goes to paying unjustified costs, not development.

Smoking Ban Whilst it is understood that this is almost universal in its application, no eVorthas been made by Enterprise to provide shelter for those who wish to smoke. Other establishments are often well furnished with either basic or extravagant shelter from the elements. Result is that many customers stay away. And why has nothing been done towards the other EU members to enforce the smoking ban? IE Spain, as I noticed while there!! As we must all come under the same rules. A point of interest—A relative who recently had a visit to the House of Commons noted and took photos on their mobile phone of the amount of smoking that was going on, I wonder if the newspapers would like to see that!! Is it one rule for the public and one fr the law makers?

General Pubco’s appear to be interested in buying, selling and renting property. They should be reclassified as PROPCOS, they have little interest in pubs as Public Houses. They have a cavalier attitude and could not care less about the running of the pubs. There are currently three Enterprise Inns houses in the Otley district newly closed. Pubs are a very important part of the community and fabric of the nation. There are thousands of closed pubs in the country with four more closing every week and this will rise rapidly. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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We realise that this downturn in trade is not the direct fault of the pubco’s completely, but the unregulated sales in supermarkets etc, smoking ban and the lack of spending power of the public at large. Bureaucratic interference from Governments, local and nationalas well as EU has had a major negative influence on the trade.

Cash Flow Controlling the cash flow requires control of stock. Quality produce and pub ambience aside pricing is the ruling factor regarding sales. The public is increasingly nor prepared to pay for pricey products. This causes cash flow problems as less cash enters the till and therefore the bank. This results in the business running at a loss for periods which get longer and longer. In our case the pubco were not at all concerned, in fact they made matters worse by severely restricting the business by reigning in the supply of wet sales as mentioned elsewhere in these notes. A pub with no beer is a sorry place indeed. This further deters customers. In The Woolpack’s case, as debt to Enterprise increased the area managers only suggestion was to raise capital by a secure loan on my private house. This would inevitably lead to, should the downturn in trade continue, the loss of my home witout any loss of sleep to the pubco. It is interesting to note that after an increase in sales the pubco invariably raise the rents, itself a disincentive. A recent case locally has resulted in the untimely death of the landlord following the enforced closure of his premises which had been financed by the sale of his house. The restrictions to the trade by the pubco are relentless, insidious and cause dismay, grief and concern amongst the many with a vested interest in the pub trade, be they licensees, staV, suppliers or the very many whose lives are entwined in the pub culture which is being allowed to wither and die, uncared about by authority.

Concusion The conduct of the pubco’s leaves a lot to be desired. They should be investigated from all angles, and made to mend their ways by means of legislation if necessary. However, it was Government interference in the trade that brought into being the pubco’s blight to this country. Politicians of all persuasions should be aware and tread carefully less matters deteriorate further. Finally, a few years ago there was a Government ad on television regarding “free enterprise” where businesses were not tied to suppliers, but had the freedom to buy from other sources. Does this still apply? And does it apply to the pubco’s??

Memorandum submitted by Borough Arms Following are my experiences relating to the Licensing Act 2004 recommendations when dealing with a rent review with Admiral Taverns one of the biggest of the tenanted pub operators.

My Background Despite best eVorts our small wet led community pub situated on the outskirts of a medium sized semi rural town had suVered from decreasing turnover of £17K and 20K respectively over the two years preceding the rent review. Our lease is a 20 year fully repairing and insuring issued by Whitbread in 1992. With no upward only clause in the lease—and no minimum annual cost of living increase based on RPI. We are tied for beer and bottled beer only—with a discount of £25 per brewers barrel on purchases from the pubco. At our rent review last tear (June 2007) our pubco proposed a rent increase of 8.2% for next three years. Admiral Taverns stated that it was the minimum they could impose and merely represented a cost of living increase. We refused to agree rent proposal—but have still been billed and have paid it since. My BDM’s response to our refusal to sign rent agreement was an blatant verbal threat to withdraw the rent oVer and take us to arbitration where he stated I could expect to have an increased figure imposed on me and payment of that increase backdated. I requested and was given a copy of figures used to set rent increase—based on our actual trading figures obtained from pubco figures and information supplied by myself. A letter was written to the Chief Operating OYcer stating that we wouldn’t agree to the increase based on some of the factors noted here—no reply was ever received. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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From experience of other pubs we have invested a higher than average amount of personal capital in the pub to improve its appearance and comfort for customers and to install a commercial catering kitchen and outside patio are/smoking area. Based on my experiences with rent review I would make following notes: (a) our turnover had decreased despite our best eVorts to maximise trade—and therefore our ability to pay rent had decreased and hence I requested a reduction in rent. (b) we had no annual cost of living increase written into our lease. (c) we had no upward only rent review clause. (d) rent increase was being based on our actual trading figures and not a hypothetical tenant. (e) personal investment in the premises that had resulted in increased trade for myself and the pubco had not been taken into account when rent set. (f) the rent calculations took no account of an increased income from sales of tied beer products.

Summary In my opinion the Licensing Act has resulted in maintaining an uncompetitive position for tied pubs such as my own and consumers alike.

Reasons We are stopped from buying products at free trade prices and passing those lower prices on to customers. We are forced to pay a market rent and pay higher prices for tied products (despite the £25 discount per brewers barrel). Some of the codes of practice laid down in the act are being paid lip service to by the pubco—ie making rent calculation available—but then the ban on UORR has been ignored as has right to arbitration between tenant and pubco also been ignored. Competition has been stifled by forcing pub tenants to pay grossly inflated prices for beer—and full market rents too—resulting in much higher retail prices for products that free of tie and managed outlets are able to charge.

Memorandum submitted by JeV Rosenmeier My name is JeV Rosenmeier and I started Lovibonds Brewery Ltd in Henley-on-Thames in June 2005. I did not come from the beer business originally, so we started very small which enabled us to do some market research without a lot of risk. We currently produce between 7–14 hl/week. I would like to explain what I discovered to be my local market. I am a very frustrated local business man, so I hope you appreciate and take on board the dire state of aVairs that this tied or managed pub system is causing for craft brewers like myself. There is a strong brewing tradition in Henley-on-Thames—the town is dotted with extinct malthouses and old brewery buildings. With the departure of Brakspears in 2002 we thought that surely we would have a market opportunity. Below is a list of the traditional pubs within the centre of Henley:

Pub Pub Company The Victoria Enterprise The Horse and Groom Greene King The Argyll Greene King The Catherine Wheel The White Hart Brakspear The Rose and Crown Brakspear The Anchor Brakspear The Angel Brakspear The Queens Head Brakspear The Bull Inn Brakspear The Three Tuns Brakspear The Three Horseshoes Brakspear The Saracen’s Head Brakspear The Row Barge Brakspear The Bird in Hand Free House Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Out of 15 pubs, only one of these are able to purchase our beer. The others within pub company ties will not be able to take our beer, even though the person running the pub would love to. Each of these pub’s landlords are forced (in their lease terms) to buy their beer (this also includes wine, spirits and soft drinks) through an approved wholesaler. This type of market suppression for the craft brewer is not limited to Henley-on-Thames, but can be found throughout Britain. There are now 600 or so craft brewers like myself whose growth is stifled in these market conditions. I do not believe that the Government should allow the brewing and pubco industry to self-police their actions as they have already been allowed to eVectively stop free trade in the beer business. If you look at the above list of pubs, all of them (bar the free house) has a distribution contract with Scottish and Newcastle, meaning that 80% or more of their beer trade comes from 1 very large producer. In my mind, this perfect monopoly has been created in the beer industry due to the government’s laissez-faire attitude and it is time for action. We would love to trade with all of the above establishments, allowing us to grow sustainably within the community. Instead, we have to travel further a field to find those that are permitted to buy from us. I’m unsure how you write legislation around it, but I would like to see anyone who owns a pub be allowed to trade with all producers within a local market (say 30 mile radius). At one time Henley-on-Thames supported more than five breweries within the village limits…today,given the market that I have discovered, we are finding it hard to keep our one alive. 29 September 2008

Supplementary memorandum submitted by JeV Rosenmeier I submitted written evidence to you on 26 September 2008 for your inquiry into the practices of the Pub Companies. After reading written evidence that you received from our industry representative, Society of Independent Brewers (SIBA), I find it necessary to provide additional evidence, which I have attached. I started Lovibonds Brewery Ltd in 2005 as a small craft brewery in Henley-on-Thames. As I stated in my original evidence, Pub Companies and their supply ties have a great impact on the small brewer by restricting the outlets that they can supply. For instance, of the 15 traditional pubs in Henley itself, only one of them is genuinely free of tie and can take our beer, the rest are owned by Pub Companies, which restrict supply. This has a great impact on our business, meaning that we cannot grow locally and we have to travel as far as Windsor and Oxford to find independent pubs that can take our beer. This situation is not limited to our area as I have many other friends in the craft brewing industry that are in the same position. In the written evidence from the Society of Independent Brewers (SIBA), they mention that they have created a scheme, the Direct Delivery Scheme (DDS), to try and help gain access to the Pub Companies for its membership. We are a member of SIBA and I do not want to down play their eVorts, but I believe there are several things wrong with DDS and I hope that you do not consider it a solution to the problem. The issues I have with DDS: — The DDS scheme only allows “cask” beer to be distributed. We don’t do any cask beer, as we have chosen to deliver beer in kegs—this makes us (and a growing number of other small brewers) ineligible for this scheme. — DDS dictates to each brewer what they can charge for their beer, based on SIBA negotiations with the Pub Co. In other words, if I produce a 4.5% alcohol beer, I will receive the same exact payment for that beer as will my competitor for his 4.5% beer. I don’t believe that all small brewers have the same cost model and don’t believe it is fair to leave no room for negotiation on pricing. I would almost go as far to say that this scheme itself is anti-competitive in its nature. In 1.8 of SIBA’s proposal, they propose: “…that cask conditioned ale is the only product available to pubs that is produced locally throughout the country, the remedy is to therefore to exclude cask conditioned ale from the tie.” As I mentioned above, we, and a growing number of small brewers in this country do not supply “cask conditioned ale”, therefore their statement is incorrect. We are aVected by this tie just as much (actually more given my first bullet point above) as any other members of SIBA and I would be disappointed if you were to take their recommendation without considering us small non-cask brewers. Other examples of small, non- cask brewers are: Meantime Brewing, Cotswold Brewing and Ridgeway Brewing. My recommendation is that the supply tie is removed completely for Pub Companies, allowing publicans from these Pubs to buy beer (and other goods and services) freely. I also believe that the number of pubs that a pub company can own should be limited to 500. I do believe that brewery ownership is a diVerent Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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scenario as breweries tend to have a vested interest in looking after their estates. Though I still believe that the number of pubs they can own should be limited to 500 pubs and that the publicans in those pubs should also be allowed to purchase outside of the tie, if they so wish. 25 February 2009

Memorandum submitted by Punch Taverns plc

1. Key Messages to the Committee 1.1 Punch Taverns (“Punch”) has evolved its business and enhanced the relationship with its Licensees following the recommendations of the 2004 TISC report. It continues to be a progressive and responsive Landlord, operating 7,560 licensed premises, with 7,351 Licensees, or “Customers” as we call them within our business. 1.2 Since 2004 Punch has continued to play a significant role in supporting its Licensees through unprecedented social and legislative change. The cumulative impact of this has been relentless, both from an operational and a financial perspective. Punch has played a critical role in supporting Government, ensuring compliance from Licensees, achieved through the provision of a comprehensive package of financial and educational support. A summary of legislation can be found in Appendix 1 (not printed here). 1.3 The two most significant pieces of legislative change since the TISC report are the Licensing Act 2003, implemented during 2005, and the Health Act 2006 which introduced the smoking ban in enclosed public places in England from 1 July 2007. When combined with the “credit crunch”, tax increases and aggressive alcohol pricing in the supermarkets, this is adversely impacting on the “health and wealth” of individual Licensees and their businesses, never more necessitating the need for a responsive and supportive landlord, as oVered under the tied lease model. 1.4 The tied model ensures that, during diYcult trading and economic conditions when beer sales may decline, the Licensees’ “rental” cost reduces as a result of the variable nature of the “wet” rent paid through the beer and machine tie. This is not the case under a Free of Tie model where the Licensees rent remains fixed—see Figure 1.

Figure 1

TIED LEASE FREE OF TIE

44% rent }

100% rent } }

50% beer ‘wet rent’ ‘Variable’ ‘Fixed’ ‘Fixed’

6% machine rent

1.5 This arrangement, where the performance of beer and AWP machine sales is shared with the pub company, is why we believe tied Licensees are currently faring better than their free trade counterparts. Punch Taverns are not experiencing the same level of closures, proportionate to our estate, as those being reported by the BBPA of 35 pubs per week. 1.6 The BEC review must acknowledge that the current challenging trading environment is the primary contributory factor for any increase in Licensees’ financial distress. The “tied” lease model is not the issue, as has been suggested by a small number of self selected pressure groups. 1.7 Punch’s long term financial structure and commitment to the pub sector means we continue to be one of the most professional and progressive pub landlords in the market. 1.7.1 We have invested £290m into our estate since 2004. 1.7.2 We have a flexible and “Plain English” accredited agreement, with a cooling oV break clause and no upward only rent review clause. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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1.7.3 We have invested in more specialist “in field” Licensee support roles, including 28 coaching specialists for BRMs called Operations Managers, 8 Catering Executives, 28 Property Managers and a PR helpline and support. 1.7.4 We have improved our tied beer range now oVering 225 draught beer brands (excluding rotational cask ales), purchased under contract from 46 diVerent suppliers. This is an increase of 45 beer brands since 2004 and greater than any free of tie operator could economically get access to. We also oVer our Licensees a choice of 353 Wines, 200 Spirit brands, 46 Cider brands and 124 soft drink brands. 1.7.5 We have enhanced our range of training programmes, with over 500 Licensees having recently attended our new “Profit through Beer” course. 1.7.6 In the last 12 months we have helped 817 Licensees introduce a food oVer into their pubs, free of charge, improving their earnings and profit opportunity. 1.7.7 We have implemented an improved process for dealing with Licensee complaints, which during the last 12 months have only averaged 17 per four week period, broadly consistent with previous years. 1.7.8 We make available to our Licensees the best AWP machines in the market, delivering the highest cash in box earnings in the pub sector. 1.7.9 Our “Customer Charter” and code of practice is recognised as one of the most comprehensive in the industry and we were among the first pub companies to have our Charter accredited by the British Institute of Innkeeping (“BII”). 1.7.10 Our licensing, smoking and specialist support packages continue to ensure our Licensees respond and comply with all new statutory legislation. 1.7.11 Our subsidised Design and Print service, has been used by 3,030 Licensees, completing 13,915 menu and promotional support requests in the last 12 months. The service is priced at cost to Punch, oVering Licensees up to 55% discounts to the market. 1.7.12 Our 8 Regional Trade shows staged once a year have seen attendances grow from 12% in 2004 to 28% in 2007, demonstrating the enhanced value and engagement with our Licensees. 1.8 Punch is proud of its business model and the contribution it makes to the UK pub industry in supporting individual Licensees, helping them to respond and adapt to legislative and economic changes. The relationship with our Licensees is one of interdependency—our success depends upon their success.

2. Punch Taverns has Complied with the Recommendations of the 2004 TISC Report This is evidenced in Appendix 2, showing a summary of each of the recommendations, with our current working practices outlined beneath. Although we have not released the AWP tie, we have complied with the recommendation to be more transparent on the treatment of AWP income. Machine income is clearly shown in our rental model summary shared with Licensees at the time of a rent review or lease renewal. This is evidenced in Appendix 3 (not printed here).

3. The Choice,Accessibility and Diversity of Pub Businesses Available to Licensees Have Increased Since the 2004 TISC Report 3.1 Despite the perception of considerable merger activity in the pub sector recently, the industry is more fragmented and significantly more diverse today than it was at the time of the Beer Orders (the “Orders”) or the last TISC review. At the time of the Orders, the Big 6 “National Brewers” owned over 34,000 pubs. Today, the top 10 pub companies own just over 28,000 pubs. (See Appendix 4) (not printed here). 3.2 Over the last four years competition between pub companies has intensified and as a result Licensee choice has improved. There are now seven pub companies which each operate over 2,000 pubs compared to four at the time of the TISC enquiry in 2004. The regional brewers have increased their presence and Admiral Taverns has emerged as a major player. 3.3 Since 2004 there are now 7% more leased pubs available nationwide. This increase has resulted in greater availability and competition in the market and pub companies are more responsive in oVering assisted entry for Licensees. This includes support initiatives such as Punch’s fixtures and fittings (“F&F”) rental scheme and deposit build up scheme. This has improved accessibility for Licensees into the pub industry. This is particularly important at the moment, as the traditional source of finance for small businesses from banks is currently non-existent. 3.4 Although the majority of our Licensees are tied to purchase beer from us, this is becoming less relevant to many of them as the market continues to diversify away from beer-led pubs. Our agreement has no minimum purchasing requirements on beer products, total freedom of brand choice and our user clause allows a wide range of retail oVers including restaurants, bars, coVee shops and gastro food venues, where beer may or may not be sold. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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3.5 Our evidence is that the beer tie is not prohibitive to new applicants in the market place. Despite the smoking ban, the credit crunch and the general downturn in consumer confidence, we continue to attract in excess of 400 applicants a month. In the past 18 months we have concluded one of the biggest letting programmes, oVering more than 600 previously managed businesses for lease, and successfully appointed new Licensees to all of them. We conclude from this that our model remains attractive and competitive in the market place.

4. Punch Continues to Offer Greater Choice and Flexibility,Improving the Quality of the Services and Support Provided to Licensees

4.1 The quantity and quality of our support package to Licensees is detailed in Appendix 5. It can be summarised under the following 4 key headings: 4.1.1 Support and training, to improve our Licensees skills and overall business capability. 4.1.2 Marketing support, to help enable our Licensees to compete in their market place. 4.1.3 Specialist help, often provided to help Licensees adapt to changing consumer trends and legislative changes, such as licensing and the smoking ban. A recent survey of Licensees indicated that they would welcome even more assistance from Punch on how to best handle the compliance issues resulting from legislation. We will be responding to this. 4.1.4 Financial and business support. This is targeted at Licensees who are in financial diYculty and need advice and help in turning their business around. In the last 12 months we have spent c £16 million in supporting Licensees with rent concessions, marketing and retail promotions. 4.2 This comprehensive range of support is further enhanced by other recognised benefits associated with the tied lease model: 4.2.1 Uniquely, the vast majority of leased pubs include accommodation. Under standard commercial arrangements, Landlords often remove this to let separately, enhancing their property returns. 4.2.2 Tied leased pubs have a very low cost of entry. In particular, the value of stock is low compared to other retail businesses. This is further enhanced by assisted entry for some Licensees, a highly cash generative business model and favourable credit terms and fortnightly rental payments. 4.2.3 Despite the tied nature of the agreement, margins earned by leased operators are still favourable when compared to other retail businesses. This can be further enhanced by capital appreciation through a Licensee selling on the business. The average premium on assignments over the last 12 months has been £71k.

5. The Punch Agreement and Terms of Trading now Offer Licensees Greater Flexibility and Choice

5.1 Since the 2004 TISC report we now provide flexibility to our Licensees on all of our new agreements by way of a cooling oV period. In the first 90 days the Licensee can give 28 days notice of their intention to leave. This provides the Licensee with a 118 day window where they can ‘walk away’ without any financial penalty. Our short term agreement, with a 6 month break clause, also provides greater flexibility and choice to new entrants. 5.2 Irrespective of the termination provisions under our agreements, we take a sympathetic approach to allowing Licensees to surrender their agreements in genuine cases of hardship or ill health, if after a period of time they are unable to sell their business and realise a premium. 5.3 Irrespective of the existence of an upward only rent review clause on our old legacy agreement, the company does not enforce this, and adopts a sensible and supportive approach to redressing the balance of rent where it jeopardises the sustainability of a fair maintainable trade for our Licensee. 5.4 With respect to the purchasing tie on our agreements, despite acquiring a large number of fully tied agreements through the acquisition of other companies, 90% of our agreements now oVer freedom of purchase on wines and spirits which have been in significant growth for Licensees over the last few years. 5.5 Punch now oVers 225 draught beer brands (excluding rotational cask ales), purchased under contract from 46 diVerent suppliers. This is an increase of 45 beer brands since 2004. The largest brewery supplier to our estate is Coors Brewers who brew 29.75% of beer sold. Regional and smaller brewers now enjoy a 98% share of Cask Ale brands provided by Punch, despite the continued decline in the UK ale market. (See Appendix 6) (not printed here). Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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6. As Recommended by the TISC Report, we Continue to Undertake and Improve Regular Feedback from our Licensees 6.1 Since 2004 we have moved away from one annual customer satisfaction survey to monthly telephone research. We have found that this enables us to respond more quickly to Licensees who are unhappy with a particular area of support or a Punch employee’s performance. 6.2 A recent survey conducted during August and September 2008 asked 20% of our Licensees at random, on a scale of 1 to 5 (with 5 being very likely), whether they would recommend their Business Relationship Manager to another Licensee. The overall score was an impressive 3.9, with remarkable consistency across our Regions. (See Appendix 7) (not printed here). 6.3 We have simplified our surveys to make them less onerous for Licensees, benchmarking our performance to a much higher level. Simple questions include: “Would you recommend Punch Taverns as a business partner, and would you recommend your BRM to another Licensee?” 6.4 We also review all complaints received from Licensees, as a valuable source of feedback. The number of complaints received, and more importantly how we deal with them has been a key focus area over the last 18 months as a result of our “great customer experience programme”. 6.5 In our TISC submission of 2004 we evidenced that our Licensee complaints had reduced to 15 per month. Figures for our last two years show these remaining stable at 14 per month during our financial year 2007, and 17 per month over the last 12 month period. We believe this to be material evidence that we continue to listen and promote a positive relationship with our Licensees, even at a time when this relationship is undoubtedly subject to greater stress.

7. Specific Questions Raised by the BEC Follow Up Inquiry 7.1 Has the Licensing Act 2003 had an eVect on competition within the market? 7.1.1 Punch Taverns took on a major role in funding, implementing and educating our Licensees and Employees with regard to the Licensing Act 2003. We incurred upfront costs of circa £15m in support of our Licensees. This expenditure has delivered little if any return to Punch Taverns or our Licensees. 7.1.2 In terms of the impact on competition we have seen little change in the trading hours being operated by our Licensees. We secured on average five additional hours per week per pub, however we believe the actual additional hours used to be around 20 minutes per pub per week (a figure substantiated by the BBPA). 7.1.3 There is little evidence that consumers want to drink much later than midnight. In recent months, the use of the pub at weekends is being adversely impacted by a new emerging “stay at home drinking experience” fuelled by the smoking ban and cheap alcohol deals in the supermarkets. 7.1.4 Any additional trade realised has been oV set by increased Punch staV costs to administer the premises license and Designated Premises Supervisor (“DPS”) changes. The Licensees have to pay for extra late night staV costs, the ongoing annual costs of the Licensing Act and costs associated with any special operational conditions imposed such as Door Supervisors or CCTV. 7.2 To what extent have revisions to the framework codes of practice met the Committee’s concerns? 7.2.1 The Punch Charter reflects the spirit of the BBPA code of practice guidelines for the industry and has been benchmarked and accredited independently by the BII as a clear statement of intent for lessees and tenants. We are confident that we have addressed the TISC Committee’s concerns. (See Appendix 8 for the Punch Customer Charter) (not printed here). 7.2.2 We have recently updated and reissued our Charter to all Employees and Licensees following organisational changes. new legislation and improved services now available. Punch will continue to evolve and promote our Charter as our commitment to Licensees. 7.3 To what extent are the codes applied by the pub companies? 7.3.1 As evidenced throughout this submission, supporting our Licensees is at the very heart of what we do and we continue to operate in line with the TISC recommendations in an open and transparent way. We acknowledge that we do not always get it right, but what is important is that our Licensees are now much more aware of what they should expect and how to complain if we don’t deliver. This ensures there is nowhere to hide for poor performing Employees. 7.3.2 Licensees are treated in a much more personal and sympathetic way with a clearly set down company complaints procedure. This is illustrated by a Regional Operations Director now having to telephone the Licensee within 24 hours to acknowledge and listen to that individual’s complaint. 7.3.3 Our Charter is a working document for Punch Employees and our Licensees, setting out detailed explanations of key touch points and events in the life cycle of our relationship. The Charter has not fundamentally changed since the 2004 TISC review, but has been updated to reflect the inevitable day to day business changes. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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7.4 Is there a need for further regulation of the industry? 7.4.1 On the contrary, there is a real need for less regulation rather than more. The cumulative impact of more and more red tape is seriously damaging the many thousands of small businesses that make up our industry. Existing legislation already represents an onerous burden on pub businesses and their operators. The pub industry does not need any further regulation, nor can it absorb any additional costs associated with complying with existing statutes. 7.4.2 There is a requirement on Government and their statutory representatives to ensure that existing regulations are interpreted and applied consistently, targeting major oVenders and not targeting well managed businesses that inadvertently breach immaterial or minor conditions. 7.4.3 Any changes in legislation should be consistent with the Better Regulation Executive (BRE) guidelines. We are strongly of the view that recent legislation has been introduced with total disregard for the five principles of good regulation, being: transparent, accountable, proportionate, consistent and targeted.

8. Specific Areas of Concern Raised by Self Selected Pressure Groups

We want to briefly address some of the public criticism levied by a small number of self selected pressure groups in the lead up to this review.

8.1 The tie puts tenants at a competitive disadvantage compared to free trade operators. 8.1.1 What is important is the actual beer price paid by the Licensee, not the discount or tie. This determines the level of gross profit realised by the Licensee, which then determines the level of rent, being a reflection of the fair maintainable profit for the business. This ensures that the Licensee is not disadvantaged in the market place against free trade operators. If the beer price is higher then the GP is lower, and consequently the level of rent is lower. 8.1.2 Unfortunately, some Licensees extract and compare the diVerent beer pricing structures in the market, failing to understand the relationship between pricing, rent and operational risk. In assessing a fair rent, a valuer will take into consideration the agreement terms, the market’s attitude to risk, the funding and the demand for the specific business in question. All these things determine what a potential tenant will oVer to pay in rent, as we operate in a free market. 8.1.3 Appendix 9 (not printed here) shows a comparison between up front cash and annual costs on a freehold purchase verses a tied lease. This shows that to purchase a freehold worth £650k, an individual would need a minimum of £236k up front cash, as opposed to £26.6k to take a tied lease.

The ongoing annual costs payable would be £48k on a freehold basis against £38.6k on a tied lease. These are fundamentally diVerent risk profiles where the individual will expect diVerent returns and paybacks. 8.1.4 It is not appropriate or equitable to suggest that a tied tenant should be no worse oV than if they had purchased a freehold or taken a free of tie agreement. The two situations are materially diVerent propositions, with diVerent risk and profit profiles.

A more detailed version of this analysis was independently validated by Deutsche bank in their analysis of the pub sector (“The Bear Pit” 31 October 2003). 8.1.5 We do recognise that markets and retail pricing can significantly change. Consequently, where a tied Licensee can evidence that they are being materially disadvantaged within their local market place due to substantial retail discounting, then pub companies will be keen to assist with special promotional support. 8.1.6 Punch has a marketing and pricing mechanic called “Bartop”. We know that merely oVering Licensees greater discounts does not always result in the discount being passed on to the consumer to grow sales. This is why we include an “in-pub retail package” that helps improve the overall consumer experience, to drive increased sales and additional profit to the Licensee. 8.1.7 The most important factor remains, that any prospective operator must carry out thorough due diligence and complete a business plan, with a forecast Profit and Loss account, ahead of entering any contractual agreement, whether it be leasehold or freehold. As acknowledged in the 2004 TISC report, this process is required and fully supported by the major leased pub companies. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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8.1.8 It must also be remembered that Licensees enter into a tied lease freely and of their own accord. They are strongly advised to seek professional advice in a number of areas during the application process. 8.2 The pub companies have not responded to the last TISC report recommending that the AWP machine tie be removed. 8.2.1 We continue to advocate that suppliers and Licensees benefit from the tie on AWP machines. Appendix 10 (not printed here) contains an extract from “What Amusement Machine?” This independent Machines Advice Bulletin outlines why,in their view, releasing the machine tie would prove counterproductive for all parties. 8.2.2 In summary, there are five positive things about the machine tie that benefits the tenant: 8.2.2.1 Machine standards are better managed centrally than by individual tenants. 8.2.2.2 Tenants undoubtedly benefit from the pub company’s economy of scale, despite royalties (discounts) being paid to pub companies. 8.2.2.3 Pub companies routinely test all new machines and only high earning models are allowed to go on to the rent list. There is a correlation between high earning machines and higher rents because they deliver higher earning cash in box. 8.2.2.4 Pub companies’ machine departments monitor machine incomes, on a site by site basis, and initiate machine changes when incomes start to decline. This ensures all parties optimise their income at any point in time. 8.2.2.5 The current arrangement, as with the beer tie, shares risk. If the machine income is consolidated into just rent, the tenant may not always have the ability to pay this as machine income is notoriously volatile. 8.2.3 Pub companies also ensure that AWPs are legitimately managed through approved suppliers, and are properly licensed with VAT being payable from cash receipts. It is also worth noting that in the last two years the number of agreements no longer tied for AWP machines has increased from 1,976 to 2,441, now representing 32% of our estate. 8.2.4 Our approach to managing AWP machines is set out in Appendix 11 (not printed here).

9. Conclusion 9.1 The British pub has been one of the most enduring business models in the world, aided and supported by the tied model. It has survived for hundreds of years, remaining at the heart of many local communities. This is particularly important, where in recent years, other local facilities such as the post oYce or village shop may not have survived. 9.2 In the current challenging economic trends of declining pub users, fuelled by the credit crunch, aggressive supermarket alcohol pricing and the smoking ban, we need the Government’s support in reducing taxation and costs associated with recent legislative changes within the industry. 9.3 The Business and Enterprise Committee should acknowledge that this challenging external environment is putting additional stress on small businesses, pub operators included. This is a major contributory factor to the loss of so many smaller and rural pubs. 9.4 No business model is immune from economic downturns, or changing consumer trends. Licensee naivety and poor judgement should not be construed as exploitation by the pub companies. Regrettably despite our best endeavours some Licensee’s businesses do fail. We believe however that the tied model compares favourably with virtually any other business sector, as a result of the high levels of support oVered by pub companies such as Punch Taverns. 9.5 Punch continually strives to enhance both its business model and its field operations managers. It has a financial structure that provides certainty for the future, provides higher levels of investment than anyone else, more training and a package of goods and services that would not otherwise be available to the individual operator. The tie on beer and machines is an integral part of facilitating this. 9.6 We believe that current market forces will dictate that pub companies continue to oVer their Licensees a fair maintainable profit share going forward. With the increased availability of leased opportunities and freeholds and with quality operators at a premium, those uncompetitive or unattractive pub companies will certainly be disadvantaged in the market place, as existing and potential Licensees vote with their feet. 9.7 Running a pub remains one of the most attractive opportunities for individuals wanting to run their own business and we pride ourselves with the openness with which we conduct our business, taking our responsibilities seriously. 9.8 We are proud of the very large number of successful partnerships that we have with our Licensees, where we have helped them to create successful careers in self-employment in our industry. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Note: Further Appendices in Section 2 include (not printed here): —Appendix 12—BRM Checklists for First and Second Interviews —Appendix 13—“Our Pubs—Your Passion” Brochure —Appendix 14—Business Plan Documentation —Appendix 15—“Your Path To Success” Booklet 29 September 2008

Supplementary evidence from Punch Taverns

APPENDIX 2

SUMMARY OF THE TISC RECOMMENDATIONS ALONG WITH PUNCH WORKING PRACTICES

1. In Summary our Commitments are 1.1 We will continue to provide choice and flexibility to our Licensees with regard to our agreements, our drinks product range and pricing and the availability of appropriate training and support packages. This will be demanded of us in this challenging market and increasingly competitive market place. 1.2 We will continue to ensure that Licensee issues and disputes are addressed in a timely and sensitive manner, maintaining our exceptionally low customer complaint numbers and external arbitration references. 1.3 We are fully supportive of the Committee’s recommendations regarding the availability of business information and appropriate due diligence by Licensees taking an assignment or new business. On assignments however, this is still heavily dependent upon the conduct and disclosure of the exiting licensee. 1.4 We will continue to advise prospective Licensees to seek independent advice from a solicitor, valuer and a building surveyor. Our selection, interview and oVer process continues to be one of the most thorough in the industry. This ensures Licensees are provided with details of the prices to be paid, net of discounts, for supplies, enabling them to prepare a business plan, including full projected profit and loss statements. 1.5 Although we have not removed the tie we will continue to be open with our Licensees about our AWP agreement and the treatment of AWP income within the rental calculation. We believe the tie is essential to ensuring we continue to secure the best income generating machines across our estate. The royalties we receive do not increase the rents to our Licensees. The decision to install an AWP machine is entirely at the Licensee’s discretion. 1.6 We will continue to have a sensible and supportive approach to redressing the balance of rent where it jeopardises the sustainability of a fair maintainable trade. We will not have upward-only rent review provisions in our leases. It is not however this company’s responsibility to ensure a minimum level of profit to a Licensee throughout the term of a Licensee’s agreement. 1.7 We will continue to review the support provided to our Licensees and continue to increase the capability of our BRMs and field operational teams. Our partnership, specialist support teams and managed house experience determine that it is in both our interests to respond to market changes, thereby enabling our Licensees with the best possible opportunity to succeed. 1.8 We will continue to promote and evolve our Customer Charter, as our articles by which all employees operate on a day to day basis, giving our Licensees a standard of quality and service to expect.

2. Our Specific Comments to the TISC Recommendations are as follows

“In the absence of the legislative option we recommend that pubcos allow their tenants more flexibility in their choice of the products they sell” Our wet product range available to licensees has further increased since the TISC report: 2.1 79 standard cask ale brands from national, regional and local brewers; 2.2 70 keg ales and 24 lagers; 2.3 a further additional 70 cask ale brands through the “Finest Cask” scheme, with 867 outlets registered; and 2.4 353 wines presented in an educational retail brochure and 200 spirit brands. We will continue to enhance our range, providing choice and flexibility to Licensees, as dictated by an ever evolving market place. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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We have further expanded the range of wines and spirits on oVer through the acquisition of Mathew Clarke Wholesale in April 2007, enabling us to introduce more competitive pricing. Our flexible agreement means we oVer choice and freedom on many non beer products. Since March 2006 the number of tied agreements in the Wines and Spirits category has halved.

3. Calls for pubco/tenant agreements to have “an inexpensive and eYcient system of arbitration with fully independent arbitrations or experts to resolve disputes without imposing legal costs on the other side” 3.1 We are committed to an open and honest dialogue with our Licensees and this is publicised in our BII accredited Customer Charter. 3.2 We believe this is evidenced by only 11 rental and lease negotiations being determined by an arbitrator over the last 12 months. 3.3 A number of feedback mechanisms have been introduced since the last review to ensure that Licensees can raise their concerns and issues at an early stage For example, askdeborah, is an email address that is widely publicised and goes direct to Deborah Kemp, the MD of our Leased business, where it is responded to by telephone within 24 hours. 3.4 Complaints procedures are clearly outlined to Licensees in our BII accredited Charter, which has a section on dealing with disputes over rent. 3.5 We continue to operate our internal rent mediation procedure, involving an independent external expert whose role is to mediate between the parties. This is much less confrontational than arbitration and helps understand the real business issues in dispute, as opposed to just determining the rent. The costs are met by the company. This process has been in place since June 2003, well before the TISC enquiry. 3.6 Only then, if this process fails, does the dispute go to external arbitration—this is extremely rare.

4. “Pubcos should insist that tenants assigning leases give prospective tenants the same level of information the pubco gives. Incoming tenants ‘should not sign agreements until they are aware of an incumbent’s profit-and loss accounts’” 4.1 It is not in our interests to see any Licensee fail following misrepresentation by an individual selling their business on. 4.2 We fully agreed with the Committee’s recommendations regarding information to be provided to Licensees taking assigned businesses. 4.3 However, we also agreed with the Committee’s comment that, as landlords, we do not have the right to unreasonably withhold consent to assignment and can only oVer advice to prospective Licensees. 4.4 Through our BII accredited Charter, we clearly communicate the process for assigning a lease agreement, including the areas a potential assignee should seekclarity on, particularly with regard to the business being sold. 4.5 We have a dedicated Transfer (plain English for assignment) team to guide Licensees through this process. This service is oVered to the seller and the incoming Licensee. 4.6 The Transfer Team will send any prospective Licensee interested in transferring their business an information pack, which clearly sets out exactly what is involved, what they need to do and the fees involved. A schedule of outstanding repairs is always done to minimise onerous repair obligations being passed on. 4.7 When an individual buys a business by way of transfer, we urge them to take financial and legal advice, and we urge them to carry out a building survey on the pub and prepare a business plan and full profit-and- loss account. 4.8 We do not have the right, and in the majority of cases, are not privy to, information passing hands or the financial arrangement between parties.

5. “We believe that many of the disputes that arise between pubcos and their tenants would be eliminated if pubcos insisted as a condition of acceptance that tenants obtained all necessary professional advice” 5.1 The need for professional advice forms a key element of our new “Customer” (our term for Licensee) induction process. Our selection, interview and oVer process is one of the most thorough in the industry. 5.2 Since the TISC report, we have introduced the role of Selection Co-ordinator to support a new Licensee right through their “recruitment experience”, from initial phone call through to selection interview and contact with the BRM. 5.3 We advise any prospective Licensee to seek independent advice from a solicitor, valuer and a building surveyor. We have a mandatory requirement that prospective Licensees show us they are using professional accountants with knowledge of the industry, or use Milestone, our recommended accountants. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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5.4 We ensure Licensees are aware of their obligations under our agreement and our Business Relationship Managers work through the company’s “flying start” guide, ensuring that the essentials are fully understood. This is covered in our mandatory and award winning Modern Licensed Retailer 10-day training course that all new Licensees go on. 5.5 Recent licensing changes, introducing the requirement for personal licences and a Designated Premises Supervisor have assisted in raising the bar for new entrants into the trade.

6. “We believe pubcos should advise their tenants of the average discount they receive, how this compares to the free-market discounts available and how much of this discount pubcos are passing on to their tenants” 6.1 The committee stated in it’s conclusions on this issue that, as with any commercial contract, the details of our contracts with individual suppliers should remain confidential. 6.2 We still believe the critical piece of information required to enable a Licensee to produce a business plan is the price, net of discounts, that he/she will pay for his/her supplies. We provide this information to all prospective Licensees to ensure they can produce a comprehensive business plan, including a full projected profit and loss statement. 6.3 As to an average free-market discount, we do not believe such a thing exists, as the free-trade market is a completely diVerent model with a diVerent set of economics driving it. To realise the best market discounts a free trade operator must contract himself to one brand owner, consequently limiting the number of beer products he can sell. 6.4 The rent is assessed having full regard and disclosure on the net price of all products, remembering that an increasing proportion of the Licensees’ turnover is contributed to from food and non tied products. See the following Chart prepared by Nielson, setting out the gradual change in drinks volume from 2005–07.

100%

90% 19.6 19.6 19.6 19.6 19.7 19.8 20.1 20.2 20.3 20.4 20.7 20.5

80% 4.4 4.4 4.2 4.3 4.3 4.3 4.4 4.4 4.4 4.4 4.5 4.6

70% 16.6 16.5 16.8 16.7 16.7 16.6 16.4 16.3 16.4 16.4 16.4 16.6

60% 2.2 2.1 2.3 2.2 2.2 2.2 2.1 2 1.9 1.8 1.8 1.7 50%

40%

30% 53.9 53.9 53.8 53.7 58.4 58 52.5 52.2 51.9 51.6 51.2 51.2

20%

10%

5.5 5.5 0% 3.2 3.3 3.4 3.5 3.7 4.1 4.5 4.8 5.1 5.3

Jul-06 Jul-07 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07

Cider Beer RTD's/Perry Spirits Wines Soft Drinks

7. “We recommend the AWP machine tie be removed. If the AWP machine tie is not to be removed quickly, there is no reason why pubcos could not introduce more transparency about their contractual relationships with their AWP operators” 7.1 The Committee concluded, correctly in our view, that the machine tie improves takings from AWPs. (See Paragraph 19 in TISC Report Conclusions). 7.2 However, we continue to disagree with the Committee’s view that the benefits of this are insuYcient and that the tie should therefore be removed. We still believe there is a strong correlation between the quality of the machine supplied and its earning potential. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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7.3 We are very open with our Licensees about our AWP agreements and the treatment of income in the profits method of rental valuation. 7.4 We have a dedicated team who are specialists in the field with the ability to analyse and understand the marketplace and then assist Licensees in making informed decisions. This, in turn, drives revenue for the Licensee.

8. “Upward-only rent reviews should be removed ‘as soon as is practicable’”

8.1 Our agreement does not contain an upward-only rent review provision. We continue to convert old agreements as they come up for renewal. 8.2 Irrespective of the agreement, the company adopts a sensible and supportive approach to redressing the balance of rent where it jeopardises the sustainability of a fair maintainable trade.

9. “Pubcos should recognise that they have a responsibility to ensure they do not exploit their position of economic strength”

9.1 The number of leases available within the market has increased by 7% since the original TISC report. This oVers real choice of business opportunities and pub companies to an individual looking to take a tied lease in the market place. 9.2 Our success depends upon the success of our Licensees. It is not in our interests to exploit our Licensees and see them fail as this incurs considerably costs to us in trading voids, re letting and BRM time. 9.3 Licensee naivety and poor judgement should not however be confused as exploitation, and regrettably despite our best endeavours some Licensees’ businesses do fail.

10. Recommends rent concessions “where tenants experience financial diYculty through no fault of their own, for example, due to demographic changes or because the pub is closed for repairs”

10.1 We always seek to ensure rents are assessed on a fair maintainable trade, making them sustainable, with a margin of safety for trading downturns and unforeseen circumstances. 10.2 In the current trading conditions we are working closely with our Licensees to ensure that they are able to respond to new market opportunities, developing new income streams to protect and grow their business. Supporting the Licensee to grow sales usually has a much more positive impact than automatically reducing the rent. 10.3 The company does adopt a sensible and supportive approach to redressing the balance of rent where it jeopardises the sustainability of a reduced ongoing fair maintainable trade. Our considerable experience ensures that every business case is looked at individually; endeavouring to oVer appropriate support in a timely way. This may involve a rent concession. 10.4 We believe that, going forward, our Licensees will have to continue to diversify, responding to changing consumer demands. Our role is to help educate and support them through this as neither party is immune to these consumer trends and economic downturns. Consequently we try to help them help themselves as opposed to just relying upon a rent concession.

11. “Pubcos should consider paying course fees, or giving grants, to tenants who attend courses such as those run by the BII so they can employ staV while they are training”

11.1 Licensee and staV training Is fundamental to the support we oVer. This is evidenced by our mandatory approach for new entrants through our 10-day introductory MLR course, which is priced at £995 which is a considerable discount, to enable Licensees to attend. 11.2 We also have a series of training programmes recognised as winners through NITA awards. These are heavily subsidised by the company, including, in many cases, oVering a money-back guarantee if the delegates believe the course has failed to deliver on its objectives. 11.3 Over the past 12 months, 2155 Licensees have attended our courses which amounts to 8,924 training days delivered. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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11.4 We have also listened to feedback from our Licensees on how we evolve our training. As a result of this we decided to “move” the cellar section of our MLR course back into the Licensee’s pub, enabling them to get real time training on site at considerably less cost to them.

12. “We recommend that the industry should review the support oVered to tenants to ensure the application of best practice in the provision of support to individual businesses” 12.1 Our operational team continue to be at the heart of our business, with considerable investment and in field coaching to improve their experience, expertise and consistency of delivery to the Licensee. 12.2 This is evidenced by the fact that seven of our BRMs have been short listed for BRM of the Year in the Association of Licensed Multiple Retailers 2008 Awards, out of a total industry selection of 17. 12.3 Since the TISC inquiry we have taken a number of steps to improve the capability of our BRMs and field operational teams. Over the last six months we have restructured our operational business to improve the support we provide to our licensees. This has included: — Recognising the importance of the BRM role in the field, reducing the size of their geographical areas and the number of Licensees they support. — Establishing the new role of Operations Manager to build the skills and capabilities of our BRMs in field with Licensees. — Aligning all our specialist field roles of catering executives, machine manages and property managers to smaller Operational Managers territories. 12.4 All BRMs have regular performance reviews and appraisals and these are audited by senior managers to highlight any trends in Licensee complaints received.

13. “Pubcos should ensure a higher level of sales support and service is provided to tenants than they might achieve on their own. The terms of these and details of consequences should form part of tenants …” 13.1 We agreed with the committee that the pub company model generally balances the costs and benefits available to Licensees. In particular, the model gives Licensees a low-cost entry into the business and continues to reward entrepreneurial activity. 13.2 We oVer a comprehensive support package including industry-leading training, marketing and promotional advice as evidenced by our submission. 13.3 Our commitments are clearly outlined to our Licensees in our Customer Charter.

APPENDIX 5

THE CONTINUING LEVEL OF SUPPORT AND SERVICES AVAILABLE TO LICENSEES 1. Since the last enquiry we have continued to build upon and improve the quality and appropriateness of the services and support we oVer. These are scheduled below, and are oVered free of charge or at a discounted price, reflecting special commercial or financial advantage to the licensee.

1.1 To improve licensees key skills and overall business capability 1.1.1 “Flying start” a structured induction and development programme for new licensees, with BRMs visiting more frequently during the first six months (the Flying Start Programme follows at the end of this Appendix) (not printed here). 1.1.2 Modern Licensee Retailing (MLR) Two week training programme covering all aspects of running a business and licensed premises. 1.1.3 ° day Chalkboarding course. 1.1.4 “Profit through Beer” one day course covering all aspects of beer from range to promotions. 1.1.5 “Profit through Finance” one day course covering all aspects of finance. 1.1.6 “Profit through Quality” one day course covering quality & perfect serve. 1.1.7 “Profit through Sport” one day course covering how to sport in pubs. 1.1.8 “Profit through Catering” one day course covering all aspects of starting a food oVer. 1.1.9 Investment Support package ISP a 1-2-1 consultation to evaluate and implement an investment. 1.1.10 Assisted Cellar Excellence “ACE” 1-2-1 cellar training in customers own pub. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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1.2 Support to enable our Licensees to compete in a challenging market, adapting to capitalise on market opportunities 1.2.1 Free “How to Guides”—Series of 10 self help guides covering: — Beer Festivals — 101 ideas — Big Screens and TVs — Key Events — Ladies — Machines — Merchandising & Chalk boarding —PR — Pub games — Students 1.2.2 Quarterly “Marketing Matters” magazine—providing a promotional planner and marketing ideas for the forthcoming season. Access to promotional deals through “Connect” brochure. 1.2.3 Monthly “Inspiration” magazine—providing hints and tips with up to date legislation news. 1.2.4 Annual Road shows spread across eight geographical locations—a combination of trade suppliers and business seminars to inspire and support licensees with ideas, deals and the confidence to try out new drinks, food, and marketing oVers. 1.2.5 A PR helpline and web based self help tool to help deal with issues or marketing opportunities. 1.2.6 A Design and Print team to help put together menus, banners, posters or any marketing idea or request. 1.2.7 A general Helpline facility “Frontline” to answer any query, or request specialist help and support for the licensee. 1.2.8 “Recipe for Success” In house 1-2-1 catering support—even where there is no kitchen, support oVered on low volume, back bar solutions. 1.2.9 “Big Orange Buying Directory” Access to competitive pricing on a range of goods and services made available through a group purchasing directory. It covers food, equipment, non-consumables, clothing, chemicals and pest control oVering discounts of up to 60%. 1.2.10 Extended “credit terms” during diYcult trading conditions the business does oVer the facility of extended credit terms by way of repayment plans, fixtures and fittings purchase scheme, deposit build up schemes and cash with order trading terms. We also oVer weekly repayment terms for large annual fees like licensing, where Punch pay up front and spread the cost over the year to the licensee.

1.3 Specialist help and support around business change and statutory compliance 1.3.1 Property and investment support to comply with statutory notices and regulations—smoking, licensing, and new Energy Performance Certificates EPC. 1.3.2 Marketing pubs for assignment on Punch web site—co-ordinate interest, lettings boards if necessary. 1.3.3 Competitive Insurance on Business interruption, F&F, stock. 1.3.4 Rating advice through approved agents—access to advice and appeals following change in business circumstances—smoking for example. 1.3.5 Licensing advice through our in house licensing team—process DPS changes, variations and enforcement action. 1.3.6 Benefits of block “Insurance” cover ensuring even high risk customers are insured—flood areas, near football grounds, high crime areas. 1.3.7 An annual landlords gas safety record. 1.3.8 Annual cellar cooling maintenance.

1.4 Financial Support 1.4.1 Our structured business diagnostic BRM tool ensures that every licensee is supported through an individual review, oVering the right support in a timely way. 1.4.2 In the current trading conditions we are working closely with our Licensees to ensure that they are able to respond to new market opportunities, developing new income streams to protect and grow their business. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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1.4.3 We believe that, going forward, our Licensees will have to continue to diversify and to focus on changing consumer demands and our role is to help educate and support them. Neither our Licensees, nor ourselves are immune to changing consumer trends and economic downturns. 1.4.4 The business support provided to Licensees with problems during the last 12 months is estimated to be in the region of £16 million, broken down in to the following key areas: Rent concessions and rent free periods. Additional Discount oV the contracted price list. Support to introduce a retail beer promotion—“Bartop”. Free stock given to Licensees by BRMs to support in house promotional activity. General marketing and promotional support funded through suppliers. BRM spend behind recovery plans—eg Accountancy services, marketing and promotional activities, menu planning and printing, banners, staV uniforms, football, darts leagues.

1.5 Summary We have made significant changes to our operational business since the last inquiry. These changes have required high levels of investment on our behalf and have centred on our absolute commitment to improve the relationship that we have with our Licensees and our genuine desire to help them run sustainable and successful businesses.

2. Operational Structure and Way of Working 2.1 We have always recognised and promoted the importance of the relationship between our Licensee’s and the operations team, specifically the Business Relationship Manager (BRM). This recognition has been supported by the regular surveys of our Licensees which have consistently highlighted the importance that they attach to this relationship and the support and value that they derive from it. Following on from the last inquiry we have continued to invest significantly in developing the skills and capabilities of all of the operational team but in particular we have focused on improving the performance of the BRM. One of the most significant investments that we have made is to restructure the field operations team and introduce the role of Operations Manager.

2.2 Role of Operations Manager 2.2.1 The Operations Manager role was introduced in September 2007 and is focused on two interlinked objectives. 2.2.2 Developing the skills and capabilities of our BRM’s via regular one to one trade visit accompaniments, ongoing coaching and support and performance management. 2.2.3 Enhancing our Licensees experience by ensuring that we are increasingly responsive to their needs and are able to eVectively resolve queries and issues in a timely fashion. 2.2.4 Operations Managers have responsibility and accountability for managing five BRMs who each support circa 50 Licensees within a tight geographical area. This ensures that they are able to both understand the local marketplace in which their Licensees operate and develop a positive working relationship with those Licensees. 2.2.5 At the time of the last enquiry and prior to the introduction of the Operations Manager role, 10 Business Relationship Managers reported directly into a Regional Operations Director who had responsibility for circa 500 Licensees across an entire geographical region. 2.2.6 We have significantly improved on the previous structure with the sole intention of delivering an improved experience for our Licensees by developing the quality of the Business Relationship Manager and ensuring that our business is responsive to their needs.

2.3 Developing the skills of our BRMs 2.3.1 In addition to these structural changes we have invested in a dedicated Operations Manager who is responsible for delivering the technical development of our BRMs. 2.3.2 Through a NITA nominated modular based training programme BRMs are quickly able to develop the technical competency in all of the required disciplines that then enable them to eVectively support our Licensees. 2.3.3 Since the last inquiry we have completed 4,042 training days and have robust individual development plans for each of our BRMs that encompass all of the technical and behavioural elements required. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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2.3.4 These plans are owned by the Operations Manager who takes full responsibility for ensuring that the individual BRM is performing at the required level and is able to establish an appropriate relationship with our Licensees and add value to their business. 2.3.5 The structural changes outlined above combined with an on-going commitment to developing our people have resulted in tangible improvements in the quality of our BRM population and how they are perceived by our Licensees. 2.3.6 In the 2008 ALMR (Association of Licensed Multiple Retailers) Operations Manager Guild, we entered 11 BRMs and out of that 11 we had seven out of the total of 18 (39%) go forward to the final stages. 2.3.7 More importantly in a recent survey of 20% of our Licensees they gave an average score of 3.9 (highest score 5) when asked would you recommend your BRM to another Licensees. 2.3.8 In addition to focusing on the development of our existing BRMs we have improved our ability to attract high quality individuals to join our business as BRMs. We have BRMs who have proven experience in retailing and the necessary skills and motivation to help our Licensees develop their businesses. Recently we have recruited individuals from as diverse backgrounds as Starbucks and Marks & Spencer.

2.4 Improved ways of working 2.4.1 Since the last inquiry we have reviewed all of our “ways of working” and made improvements that ensure greater structure and transparency in our relationship with our Licensees. 2.4.2 We operate to a standard structured 8 week call cycle whereby each BRM will conduct a planned face to face review with each of their Licensees focusing on the individual opportunities and issues in that business at that specific time. 2.4.3 The details of the visit are recorded and signed by both parties providing clarity around commitments made by both the BRM and our Licensee. These record sheets are returned to our head oYce where they are scanned and stored; this ensures that if a complaint or issue arises we have an accurate record of events and can resolve the Licensees concerns. 2.4.4 We recognise that our new Licensees need additional support and consequently we have put a huge amount of focus into ensuring that any new Licensee is given the very best opportunity to succeed. 2.4.5 Since the last Inquiry we have introduced our “Flying Start” programme which provides more intensive and structured support to new Licensees throughout their first six months. In this time we eVectively double the contact that the BRM has, with a structured review of the business taking place every four weeks. This is also backed up by additional contacts either face to face or via the telephone. 2.4.6 The Flying Start programme covers all of the key areas that a new Licensee needs to be aware of and reviews these in a logical sequence, ensuring that the necessary business controls are established in the critical first few weeks.

3. “Your Place”—Online Resource for our Licensees 3.1 In July 2008 we upgraded our online Licensee “Your Place” web site, as part of our ongoing eVorts to help them drive trade and build sustainable businesses. 3.2 Your Place includes a range of enhanced features such as more content in easyto-find sections, quick links to the newest information, a range of virtual and downloadable resources and the latest Brulines data. 3.3 Automated registration has also been introduced which means Licensees can gain access to the site in seconds. It is already receiving over 100,000 hits per month and we are encouraging Licensees to log on and take advantage of the online resource to help maximise their pub profitability. 3.4 Key areas of the website include: 3.4.1 Flow monitoring—for those Licensees who have Brulines installed at their pub they can access the detailed information it captures about their draught sales. This allows Licensees to schedule and assess promotions, plan rotas and check online cleaning frequency. 3.4.2 Design Point of Sale—the design and print online service allows Licensees to design their own banners, posters and tent cards using templates. Licensees can choose their favourite design and add their own personal details before ordering and purchasing their items online. 3.4.3 Marketing information—Licensees can flick through the pages of all our support guides and promotions using page turning software. 3.4.4 Finance—a range of information is available to help Licensees understand and manage their finance, including details on cash flow, cash management, break even and retail pricing. 3.4.5 Development—details of all our training courses are to hand with an outline of the content for each course, testimonials and how to book. 3.4.6 Food—from introducing a simple food oVer to enhancing an existing food oVer this section contains useful information to help Licensees to cash in on this income stream. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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3.4.7 Responsibility—from licensing support to noise control, this section provides Licensees with information on all areas of responsible retailing. 3.4.8 There will be even more focus around online activities for 2009 as ebusiness is at the top of our agenda.

APPENDIX 6

DRINK SUPPLIERS AND BRANDS AVAILABLE TO PUNCH TAVERNS’ LICENSEES

Beer Suppliers (46 in Total and 225 Brands Excluding Rotational Cask Ales)

National Suppliers Number of brands Coors Brewers 21 Carlsberg 46 UK 39 Scottish Courage 28 Diageo 1 Anheuser Busch 3

Regional Suppliers Number of brands Regional Suppliers Number of brands Adnams 3 1 Belhaven Brewery 1 SA Brain & Co 3 Black Sheep Brewery 2 Timothy Taylors 2 Butcombe Brewery 1 Wadworth 1 Caledoniam Brewery 4 Wolverhampton & Dudley 7 Charles Wells 6 Young & Co 3 Danbiel Thwaites 2 Hardy & Hansons 3 Everards Brewery 1 Otter Brewery 1 George Bateman & Sons 4 Ales of Scilly 1 Greene King 5 Ridleys 2 Harvey & Son 1 Hambleton Ales 1 Heineken UK 1 Hobsons 2 Highgate Brewery 3 Cotleigh 1 Holsten Distributors 2 2 Hook Norton Brewery 2 Titanic 3 JW Lees and Co 1 Exmoor 1 Jennings Bros 4 Fullers 1 Refresh UK 4 Sharps Brewery 1 Ringwood Brewery 1 Shepherd Neame 1 Robert Cain & Co 2 Beer Seller various Total—46 beer suppliers and 225 brands

In addition to the contracted suppliers detailed above, during the last three years Punch has sources beers from a further 35 Small Independent Brewers Association (“SIBA”) members under the rotational cask ale schemes. Of the above 46 beer suppliers, 17 are also members of SIBA, giving a total of 52 SIBA members whose ales have been available to Licensees.

Other Drinks Suppliers (46 in Total)

Allies Domecq Spirits & Wines Hallgarten Wines Ltd Bacardi Brown-Forman Brands Hayman Ltd Bibendum Wine Ltd KC Brands Ltd Britvic Soft Drink Ltd LIQUIDe Ltd BRL Hardy Wine Co Marne & Champagne DiVusion UK Budweiser Budvar UK Ltd Mathew Clark Brands Ltd HP Bulmer Maxxium UK Ltd Burn Stewart Distiller Plc Paragon Vintners Casa Julia PLC Percy Fox & Co (UK) Cave Direct Percy Fox & Co (USA) Cellar Trends Pernod Ricard UK Ltd Coco-Cola Enterprises Ltd Red Bull Company Ltd (RBCL) Constellation (UK) Showerings Ireland Ltd Cott Beverages Ltd (Midland Di SHS Sales & Marketing Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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E & J Gallo Winery Spring Mineral Water Co Entbe Ltd Stowford Press FIOR Brands Ltd Strathmore Mineral Water Co First Drink Brands Ltd Thatchers Cider First Quench Ubevco Distributors Ltd GbI International Ltd United Brands Grape Expectations Waverley Vintners Ltd H&APrestige Packing Co Ltd H Weston & Son Halewood International Ltd Wine & Spirit International

APPENDIX 9

COMPARISON OF COSTS OF PURCHASE VS COST OF TIED LEASE

1. Capital in-going costs—purchase vs tied lease

Capital in-going costs Buy Lease Purchase price £650,000 Loan 70% LTV £455,000 Balance £195,000 Deposit ® rent £8,000 Stamp Duty 4% £26,000 Stamp Duty £3,048 Fixtures & Fittings £12,000 Fixtures & Fittings £12,000 Stock & Glassware £3,500 Stock & Glassware £3,500 Total Cash Required £236,500 Total Cash Required £26,548 Source: Punch estimates

2. Annual Costs—purchase vs tied lease

Annual Costs Owner Lessee Interest 7% £31,850 Rent £32,000 Min required return 15% £35,475 Min required return 25% £6,637 on capital invested on capital invested Free Trade Barrelage £90 per (£18,900) Discount barrel Total Annual Costs £48,425 Total Annual Costs £38,637 Source: Punch estimates 3. In the assessment, we have assumed that in addition to interest or rent, a Licensee should be seeking a reasonable return on the money invested in the business at the outset. We have suggested a return required to 15% on a freehold purchase and 25% on a long lease. We have used a free trade discount of £90/brl, but made no allowance for the much greater produce range and suypport services available under the tied lease model. [A more detailed verson of this analysis has been adopted by Deutsche Bank in their analysis of the pub sector (“The Bear Pit”, 31 October 2003)]. 4. Even with the extra return criteria, in the current market a Licensee who leases rather than purchases would save some £9,800 per annum and make capital cost savings of £210,000. Although the Licensee would not gain on the capital appreciation of the freehold, the Licensee has an asset which is assignable. It is worth noting that the average assignment premium paid by in-going lessees on an assignment if £71k in the Punch estate. 5. A further major issue is risk. Should the value of the property fall for some reason, the whole of this value would be felt by the owner, generally in the form of “negative equity”, whereas the Licensee is largely protected. The purchaser is also highly susceptible to an interest rate increase. If borrowing rates rise, every 1% rise in interest rates in the example above would cost a pub purchasers £4,550 per annum.

APPENDIX 11

OUR APPROACH TO MANAGING AWP MACHINES 1. Our approach to managing AWP Machines: 1.1 We believe that royalties should be treated in exactly the same way that discounts are treated on beer. They reflect the purchasing power of the pub company. It also provides certainty of supply for the machine suppliers, enabling them to invest in new product development. This innovation and investment into the industry enhancing sales and consumer interest in continuing to play AWP machines. Without this many supplies would not be able to supply the free market without materially reviewing their pricing structure upwards. This is not dissimilar to the TISC committee’s observation of what would happen with the brewers and brand owners if the beer tie went. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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1.2 The dry rent (share of machine income) is a variable income stream, always representing a % share of the income realised through the case in the box of the AWP.

1.3 In order to protect this income Punch employs a dedicated team who are specialists in the field with the ability to analyse and understand the marketplace and then assist Licensees in making informed decisions.

1.4 Within 20 days of taking a pub, we can guarantee a visit from a Machine & Vending Manager to conduct a full review of the opportunities on site and assist the Licensee to maximise his potential cash flow. This is always conducted to deliver the Licensee’s requirements and to be in harmony with the ambience of the outlet.

1.5 In addition to the field based staV, a small central team that we provide the field with the best levels of delivery available in the marketplace.

1.6 In ensuring choice of supplier we currently have both national suppliers listed and 35 regional suppliers to which a Licensee can transfer his business at any time.

1.7 Machine testing the approval is a key area, managed through an approved machine rental list. The diVerence between a poor and a good machine is probably around 15%, but annualised could be significantly greater, compunded by a series of poor purchase recommendations. In the last year alone we have tested over 150 diVerent AWP machines and approved only 39 to the rent list.

1.8 In order that we continue to maximise income potential for every site we have a seven rent banded list. This covers a range of rents from £76.65 down to £26.46. We believe this gives the Licensee the ability to match income and potential income with the correct grade, and therefore rent, machine.

1.9 In recent years the industry has polarised to two manufacturers and any further erosion could possibly result in a more limited, certainly more expensive choice of machine.

1.10 The graph below shows the cash in box available after VAT, AMLD (Amusement Machine Licence Duty) and rent. The net eVect is that Punch tracks at £20 minimum per week over a free trade site.

CIB Average Less VAT & AMLD & Rent Month CY08 £110.00 £105.00 £100.00 £95.00 £90.00 £85.00 £80.00 £75.00 £70.00 £65.00 £60.00 Jan Feb Mar Apr May Jun Free Trade £77.28 £81.27 £85.57 £82.16 £79.04 £72.91 National Ten £94.80 £96.99 £98.93 £97.88 £93.62 £92.04 Punch £99.58 £98.85 £105.10 £106.24 £99.21 £96.68 Regional Ten £81.00 £83.73 £87.25 £84.67 £86.96 £81.54

Further supplementary evidence from Punch Taverns

I sense that you, like I, felt a little frustrated with the course of events in the recent Hearings into the relationship between pubcos and their tenants. Sadly, the process got sidetracked this week on minor issues, whereas we all have grave concerns about the impact that regulation and increased beer duty is likely to have on the great British pub and smaller traditional brewers in these unprecedented economic times. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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It would be wrong to take a view from the evidence sessions that the industry is deeply divided. It is in the absolute interests of Punch Taverns to do whatever is reasonably possible in these challenging times to protect and maintain a sustainable future for our pubs. Sadly, it is likely to be the case that the economic circumstances will see more pubs closing that has been the case in the recent past. However, our aim is to find a common ground with our leased and tenanted customers to ensure that the vast majority survive. In the session on Tuesday, we confirmed the following assistance which we will begin to implement immediately: — We will increase the cooling-oV period for new leases from 90 to 180 days. — We will execute a Deed in relation to any pub that approaches us with the request to have their historic upward only rent review clause permanently removed from their lease agreement. In addition, we will shortly be announcing the following initiative: — In these challenging times and in addition to the significant levels of support that we are already providing our customers, we would be prepared to allow our customers to purchase their pub from us provided that it is in the best interests of both our customer and ourselves. Whilst finance is not easily available at present, it is hoped that some customers would be avle to take advantage of the current historically low interest rates. We also made the following other commitments at the session on Tuesday: — We will send you a technical note explaining how the Brulines systems diVerentiates water from beer going through the pipes. — We will look into any of the 12 complaints from Punch licensees that you are able to let us have.

Industry Initiatives

Despite the perceived battle lines, the industry is a very amicable place and there is a huge consensus that the common enemy is regulation, over zealous social responsibility legislation, the tax accelerator on beer and the outrageous pricing strategies of the supermarkets. The chairman of the ALMR, Tim Sykes, and the chairman of the FLVA, Dennis GriYths, are both personal friends of mine and having spoken to them since the evidence sessions we are each strongly of the view that further progress can be made by a few simple actions: — Excellent work is being done by the BII to create a low cost option for pub tenants and their landlords to resolve disputes over rent reviews and this needs to be seen through to a satisfactory conclusion. This initiative is curretnly in the pilot stage and will be launched in the early part of next year. — The industry can do a much better job of highlighting to their lessees the large number of organisations that can help in providing advice in such circumstances—such as the BII helpline, the FLVA, the SLV,the ALMR and the BBPA. It should be the responsibility of all companies that lease pubs to individuals to make their respective lessees aware of the existence of these organisations. Moreover, these organisations should not fear seeking some of their funding from the pub companies, provided it is done on an arms-length basis and with no influence associated with the donation. — It is my strong view that clear, plain English agreements, plain English accredited codes of conduct and appropriate dispute resolution processes will further improve the requirements of fairness and transparency. I also believe that these eVorts would positively diVerentiate the pub sector from other retail industries that rely on the commercial lease market with none of the safeguards that we provide or are proposing. Through these contacts, and provided you feel this is in line with your findings, I would be happy to progress the discussions in an eVort to come up with some concrete actions that the Committee can adopt. Finally, I would welcome the opportunity for any members of the Committee to see the pub trade first hand with either myself or one of my operational colleagues—it is worth nothing that we have pubs in every single Committee members’ constituency. It is my view that by getting you out in trade you will meet large numbers of incredibly dedicated people, both employees of Punch Taverns and our leased and tenanted customers, who are all working flat-out in these challenging times to protect and evolve the pub industry for all our futures. 11 December 2008 Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Further supplementary evidence from Punch Taverns Plc Further to my letter of 11 December, I am now enclosing a follow up note to some of the questions as requested at the evidence session on 9 December. These relate to the following: — Question 280 on leased and managed statistics. — Question 217 on evictions. — Question 258 on telephone costs. — Question 261 on Brulines equipment. Please let me have any other questions and also let me have the detail of any of the 12 complaints from Punch licensees that you are able to let us see. As I mentioned in my letter, we would be only too pleased to arrange some visits for any members of the Committee so that you can see the pub trade first hand.

In Response to question 280 from the Transcript of Oral Evidence Q280 Mr Binley: “…your statistics suggest that the diVerence between leased pubs and managed pubs, and I have already made the point about the diVerence in size of business, that the leased pub is, on average, about 11.5% of the take of the managed pub, but I said that the diVerence between 2006 and 2007 with regard to take is that take is up in tenanted pubs by 6% and in managed pubs by 10%, but the profitability has shown a 5% increase in the tenanted estate, but a 20% drop in the managed estate….” Now, this suggests to me that either your DMs or your area managers are a total waste of time or you have got some special costs in there that I do not understand or you have had a massive improvement with your tenants in your tenanted estate. My concern is that, if this is used in discussions on rent reviews, then we do need to understand that diVerence because it is an important piece of evidence. Mr Thorley: “…What I would say though is that in terms of the profitability of the leased and tenanted pubs, the number which I do recognise, the 5% increase, reflects the fact that over the course of the last few years we have sold more than 2,500 pubs as part of the evolution of our business.”

Answer in 2 parts

1. Take of Leased pub 11.5% of Managed pub With reference to our statutory accounts, from which we believe this statistic was calculated, it should be noted that the turnover shown for our Leased estate, does not represent the retail sales of our customers, it merely represents an element of the drink cost of goods inwards to our customers, and other income streams to Punch, for example the rent payable by our customers. (It should also be noted, that the cost of drink sales for our customers, is often made up from a variety of diVerent suppliers, for non beer and sometimes cider, alongside Punch). The turnover for our managed estate, does relate to retail sales over the bar. Therefore the two numbers are not comparable. Attached is a breakdown of our income from our statutory accounts to August 08 (Appendix A), and alongside this, we have shown two typical “average” retail P&L’s for our customers (Appendix B). We hope this goes some way to help illustrate the diVerent structure of the two P&L’s.

APPENDIX A

AVERAGE PUNCH P&L—PER 2008 PRELIMS, 7,572 PUBS (53 weeks converted pro-rata to 52) 52 wks Beer Sales £63,750* *(works out to approx 74% of the example customers COS, with 26% of wet COS sales “free”) Rent £32,653 Machines £3,887 Other £10,755 Total Sales £111,174 £113,312 53 week prelims average

Beer Margin £32,264 Rent £32,653 Machines £3,887 Other £4,146 Total Gross Profit £72,950 £74,353 53 week prelims average Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Rent Payable "£1,814 Other Costs "£7,645 EBITDA £63,491 £64,712 53 week prelims average Depn "£2,721 Operating Profit £60,770 £61,939 53 week prelims average

APPENDIX B

ILLUSTRATIVE LESSEE RETAIL P&L’S £9k/wk Wet Sales £250,000 £5k/wk Wet Sales £230,000 Dry Sales £200,000 Dry Sales £45,000 Machines £9,000 Machines £11,000

Total Sales £459,000 Total Sales £286,000

Wet Margin 56% £140,000 Wet Margin 56% £128,800 Dry Margin 62% £124,000 Dry Margin 55% £24,750 Machines 33% £3,000 Machines 33% £3,667

Total Margin £267,000 Total Margin £157,217

Wages 19% £87,210 Wages 15% £42,900 Business Rates 3.5% £16,065 Business Rates 3.5% £10,010 Utilities 4.0% £18,360 Utilities 4.0% £11,440 Other 10.0% £45,900 Other 10.0% £28,600

Total Exp 37% £167,535 Total Exp 33% £92,950

Rent £50,000 Rent £32,000

Total Costs £217,535 Total Costs £124,950

Lessee Share £49,465 Lessee Share £32,267

We believe the average profitability of our customers is c£29k, and with an “allowance” taking into account the estimated value of accommodation, would deliver the equivalent “salary” of c£38k. The diagram below illustrates the relative investment risks and returns of the partnership.

APPENDIX C

Punch Our Lessees £62k per £100k per £38k per pub pub pub 10% Return 76% Return

£620 k Investment £50k Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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2. Take is up 6% in the Leased Estate, and 10% in the Managed Estate, whilst profitability in the Leased Estate has grown by 5% with a drop in the Managed estate of "20% The leased estate has changed in profile quite dramatically when comparing the year to August 08 with the year to August 07. Within our estate, between the two years, we disposed of 973 smaller pubs, and transferred 583 larger pubs from our managed estate. With a published “like for like” profit decline of "3.4% (shown in our preliminary results presentation on our website), the entire growth in average per pub profit growth has come from the changing shape of our estate. On average our customers now have larger pubs, with larger profits than those pubs/customers we were in partnership with last year. It should also be noted, that the 5% profit growth shown above, relates to a 53 week year compared to a 52 week year, the equivalent is 52 week comparison is 4% growth.

Leased Pub Numbers FY02 IPO FY03 FY04 FY05 FY06 FY07 FY08 Cumulative Start of Year 4,160 4,249 4,302 4,515 7,334 8,227 7,846 7,561 4,160 Pubmaster 3,115 3,115 InnSpired 1,064 1,064 Avebury 409 409 Other Acquisitions 187 283 80 106 96 85 19 856 Lease conversions 74 563 20 657 Disposals (45) (70) (376) (686) (551) (933) (40) (2,701) End of Year 4,302 4,515 7,334 8,227 7,846 7,561 7,560 7,560 The managed estate has similarly undergone a significant change in composition between the two years. At the start of FY07 there were 1,410 managed pubs. During the course of FY07 and FY08, 94 pubs were acquired, 583 were transferred to lease and 57 were sold leaving a closing estate of 864 pubs. On average 870 pubs were operated during FY08 compared to 1,191 pubs in FY07, a reduction of 27%. The pubs operated in FY08 are generally larger with average sales 10% higher than the FY07 estate, as you have noted. This does not, however, mean that they were growing sales. Indeed on a like for like (same pub) basis sales were down 3.3%. The average operating profit per pub was 17% lower in FY08. This has similarly been impacted by the change in the make up of the estate. The retained estate is more biased towards food, 38% of sales related to food in FY08 compared to 33% in FY07. It also contains a higher proportion of leasehold pubs, average rent payable was £45k per pub in FY08 and only £38k in FY07. Both these factors result in lower profit conversion in the retained estate.

In Response to Question 217 from the Transcript of Oral Evidence With respect to the answer given to Q217 “how many tenants have you evicted in the last three years?” At the time, we were unable to provide the answer. We have now reviewed our records and can confirm that between 1 January 2008 and the 12 December 2008, the number is 109.

In Response to Question 258 from the Transcript of Oral Evidence With respect to the answer given to Q258 “You operate premium-rate telephone lines for tenants which means eVectively that they have to pay for their particular concerns, queries and discussions with you. What is your comment? How much do you make from it?” We would like to clarify the answer as follows: Answer: This is not correct. We currently operate a 0844 number that costs 4p per minute (national landline rate) to call. Obviously, as with all numbers this cost can vary dependent on the operator of the line or mobile used by the caller. Punch do not make any money on this phone line and any volume based, retrospective discount (up to 0.9p per minute) our provider may provide, would go towards the cost of us providing a national landline rate for our customers. However, we do not receive this discount if our provider’s volumes are not met within a full calendar year, Question: Well, we have been told that. Answer: We did have an 0870 number which was more expensive to call, but changed this six months ago to the 0844 number (as above) so that we could reduce the costs for our Customers. The volume based, retrospective discount that we negotiated with our supplier is aimed at keeping our operating costs as low as possible whilst providing an eVective support facility for our Customers.

In Response to Question 261 from the Transcript of Oral Evidence Question: Could we have a technical note on that [Brulines equipment distinguishing the flow of beer vs pipe cleaning water] rather than spend time on it now? Answer: Please see the attached two files containing a line cleaning overview and examples of the process. December 2008 Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Line cleaning process within the Brulines draught dispense information

The Line Cleaning Process

1. Line cleaning is a practice where water and detergent are drawn through the beer lines to thoroughly clean them. 2. It is standard accepted industry best practice to clean all beer lines once a week. 3. By far the most common method of line cleaning is for the process to be done in a single session outside the normal trading hours of a pub utilising the line cleaning water ring-main. 4. During this process the licensee will draw the water used during line cleaning through the equipment provided by the brewery for this purpose. This equipment which allows all lines to be cleaned simultaneously is generally a hose which has a number of keg connectors inserted along its length (this equipment is generally referred to as the line cleaning ring-main). 5. To identify when water and line cleaning fluid is used to clean the lines, Brulines install a flow meter in the line cleaning water ring-main. Unlike the flow meters installed in the individual beer lines which are calibrated to exact volumes of beer dispensed, the meter on the ring main is not calibrated, its purpose is to detect movement not volumes. 6. There are two other methods of line cleaning that Brulines may have to identify in a public house. These are used on cask beers or when the water ring main is not operational. (a) The licensee may clean the lines by drawing water from another source, most commonly a bucket or other container. If a licensee is cleaning with detergent this will most commonly be on one or a number of specific lines (normally cask) and will generally be done outside trading hours. (b) The licensee may also occasionally draw water through the lines during trading hours, this method does not normally involve the use of a detergent, it is generally done on cask lines and is not normally a full clean. It is called a “flush through” and is the process whereby the licensee will draw through a volume of water (normally one or two buckets) between change of casks. 7. During the line cleaning process it is normal for three liquid types to be drawn through the Brulines beer flow meter and the volume detected by that meter. The Brulines meter does not diVerentiate between the liquid types. It will record the total volume of liquid dispensed through each individual meter in each hour time period. 8. The diVerent liquids drawn through the beer meter on a standard clean include water, beer and detergent. A standard beer clean on a beer line would include the following volumes of liquid.

Beer held in Water (also Line cleaning Water (also Beer Total the line recorded through solution recorded through ring main) ring main) Pints 3 4 4 16 3 30

9. As the flow meter does not distinguish the diVerence between beer, water or line cleaning detergent, all volumes recorded in the hour of an identified clean are removed. This will mean the benefit of any doubt on the exact volumes of beer or water used in the clean are counted in the benefit of the licensee.

Identifying Volumes used in the Line Cleaning Process

10. The dispense volumes from each Brulines installation are downloaded by Brulines each week, the Brulines in-house software then scans all the volumes which have passed through the line cleaning flow meter and the beer meters. It either automatically identifies certain volumes as cleaning or highlights these events for manual review. 11. The Data Auditor then evaluates all items raised for manual review and identifies all volumes that would be considered line cleaning. The auditor always takes a cautious view during this review to ensure that any decision is always in the benefit of the licensee in respect of liquid identified as water in the line cleaning process. If any volumes are suspected as line cleaning they are identified as water, all water volumes are transferred from the beer table to the water stack table. 12. It is a feature of the Brulines data, that none of the data is lost in the line cleaning process. The liquid flows identified as line cleaning remain as dispense volumes and are transferred to another data table called “the water stack table”. This means whilst they are not reported upon in any beer dispense reports, they are retained so there is a clear audit trail to the original data downloaded from the system. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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13. The events identified by the Brulines system are as follows: (a) If there is any volume detected on the water line in excess of 5 pints in any hour outside normal trading hours (midnight to midday), this volume and any dispense volumes on any beer lines are automatically removed from the beer volume tables and stored in the water stack tables. (b) If there is any volume detected on the water line in excess of 5 pints in any hour during normal trading hours (midday to midnight), this data is flagged for manual review by the auditor. If the auditor considers these volumes to be line cleaning, they are highlighted and removed from the beer volume tables and transferred to the water stack tables. (c) If there is any volume detected on any beer keg lines in excess of 15 pints in any hour, outside normal trading hours (midnight to midday), this data is flagged for manual review by the auditor. If the auditor considers these volumes to be line cleaning, they are highlighted and removed from the beer volume tables and transferred to the water stack tables. (d) If there is any volume detected on any beer cask lines in excess of 10 pints in any hour, regardless of the trading hours, this data is flagged for manual review by the auditor. If the auditor decides any of these volumes are cleaning, they are highlighted and removed from the beer volume tables and transferred to the water stack tables. 14. Examples of this data and how it is applied to the beer tables and the water stack tables are enclosed on the attached appendix (not printed here). 15. The final check is that following line clean the auditor reviews each site every day for unusual volume flows or suspected dispense in excess of delivered beer volumes. Any such activity will be investigated. If there are any volume movements that look like they may be line cleaning activity then these volumes are transferred to be stored in the water stack table.

Further supplementary evidence submitted by Punch Taverns Thank you for your letter of 3 February containing the two submissions from Punch licensees. We have now had the opportunity to investigate the various points that Mr E and Mr S have raised and I am enclosing copies (not printed here) of my replies for you to share with the Committee as requested. I know that Mr LuV and the other Committee members will understand that there are always at least two sides to every story. Unfortunately, at times like these, it is the few with negative views to express that shout very much louder than the many who diligently get on wit running their businesses. We are, of course, disappointed with the content and the tone of these two submissions. With regards to the question on Brulines, the technical note that we sent to the Committee in December confirms how the equipment deals with line cleaning. The system does not measure the diVerence in density of beer versus water. 19 February 2009

Memorandum submitted anonymously I am writing to support the further investigation into the pubco’s following the voluntary codes set down by the Committee in 2004. I have read the 2004 Report and agree with all the evidence that was supplied at the time. There has been no change since the last report either in the evidence or in how Punch have behaved. My husband and I took on a Punch Leasehold pub in 2005 not having had anything to do with the pub trade (my husband is a senior project manager and I am an accountant). We have regretted it ever since. We just can’t believe that we are totally helpless in dealing with them. We have no rights and no-one to support us. We have worked for three years, got the turnover up £100k by hard work and as yet have never been able to pay ourselves anything. We have both had to go back to our original professions and leave the staV to run the pub. The pub makes £60k before rent and the pubco takes £86k rent leaving us to fund the £26k shortfall. So not only do we make no money at all but have to pay for the privilege. We have a rent review in October and according to the Punch Charter, we would be contacted 12 months prior to start discussions. They had no intention of ever contacting us. In the meantime I have contacted an independent rent assessor who has been dealing with the review. The code of practise states that the rent will be based on 50/50 of the divisible balance. Not according to Punch. They concoct a profit and loss account, inflating the turnover and grossly underestimating the costs. In our case, their P & L states that we will make £172k before rent. If we try to speak to anyone our request is ignored and also any correspondence from our Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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independent assessor who incidentally found the rent should be £46k before further allowances due to the drop in trade over the last 12 months following the smoking ban and current economic climate. With adjustments the rent should be around £26k not the £86k that they are demanding. They produce propaganda on a huge scale telling the world that they have a good model and that the beer tie is fair but this is just to bolster up their falling share prices and to keep the real story out of the press. We also have to endure bullying tactics and accusations of buying in outside the tie, totally not true. In the 2004 report Giles Thorley, chief executive, stated that regular meetings are held so as Punch “customers” can get together to discuss problems and have access to a senior manager. No such meetings exist as I was told by the BRM when I asked to attend. Punch’s main tactic is to constantly make out that you are doing a bad job and to keep you isolated from anyone else. I consider Punch’s business to be nothing more than legalised extortion. There is no such thing as fair maintainable trade or rent and there will never be a single person who will be your average landlord.

Recommendations

Removal of the beer tie This is unfair competition. Debra Kemp of Punch was quoted in The Publican magazine as saying that it doesn’t matter if the beer price is inflated as the landlord receives it back in the 50/50 divisible balance calculation. As can be seen from my paragraph above this is clearly not the case.

Removal of the annual RPI increase My rent at a starting rate of £86K will very shortly be over £100k with the addition of RPI. That will be over 25% of my turnover and the general rule of thumb is that a business will be insolvent at 20%.

Independent Rent Reviews In my opinion I think a levy should be imposed on all pubcos to fund a totally independent body that will look at the true rent position. This calculation can never be left to the pubco.

Code of Practice Giving pubcos a code of practice is like giving The Kray Twins a code of practice. All the above the points need to be put into the lease document and given a legal standing. This is the only document that the pubco will quote from. In conclusion, the pubcos have made fools out of the 2004 Select Committee. They have lied to the Members and will probably do the same again. They should have no problem with the above recommendations as after all they are in their code of practice. Please don’t let them get away with this again.

Memorandum submitted by The British Beer and Pub Association

Background

1. Pub Sector 1.1 There are approximately 130,000 on-trade licensed premises in the UK of which around 57,000 (43%) are pubs comprising managed (9,000), tenanted/leased (30,800) and free houses (17,200). Around 80% of pubs are operated as small businesses by tenants/lessees or independent owners of free trade premises. This inquiry focuses on tenanted/leased pubs which represent around 54% of the pub market (24% of all on-trade licensed premises). BBPA pub owning members (major pub operators, vertically integrated brewers and pub operators and minor pub operators) own approximately 88% of the UK’s leased/tenanted pubs. 1.2 Pub owning companies predominantly own freehold pubs, although a small percentage are leased from third-party landlords or even from other pub owning companies. The pub owning companies seek to make a reasonable return on their property assets for their stakeholders through the letting of pubs to self- employed operators. Pub company revenue is generally derived from a combination of rent, margin on the sale of drinks and a share of machine income; these vary by pub company depending on the type of agreement. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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1.3 Prospective tenants and lessees can choose from a wide selection of pub companies all oVering varying types of business agreement and support. Any tenancy/lease agreement is a commercial contract that is signed by the operator on a voluntary basis in full knowledge at the outset of the terms of that agreement. The fundamentals of such agreements are not amended once the tenant/lessee is in place.

Tenancies 1.4 Tenancy agreements historically have been the traditional choice for many licensees providing low cost entry into a self-employed business. Tenure is for a relatively short period (around three to five years and normally with the opportunity to renew) and secured under the Landlord & Tenant Act. Tenants are likely to be “tied” for all supplies of drinks with the owning company responsible for the upkeep of the property. Rents are agreed between the pub owning company and tenant and are based on what is felt the average-to-good tenant could achieve. Rent assessments are usually undertaken following a full profit and loss assessment of the pub and using the company’s in-depth knowledge of the pub’s trading history. The resulting rent generally includes the benefit of tenants living accommodation. 1.5 This flexibility ensures that key factors such as location, environment, quality of income and demand are fully reflected in rent discussions. Accounts used for evaluation should have been audited and prepared by qualified accountants.

Leases 1.6 A lease agreement provides a similar low-cost opportunity but for longer term investment. Lessees can realise a goodwill benefit through assignment of the lease after a qualifying period which allows the lessee to make a capital sum on sale of the business which can be substantial in some cases. Lessees are likely to be “tied” for the supply of beer and will normally be responsible for all repairs and decorations of the premises. Pub leases represent an extremely cost-eVective way of starting up in business and exit costs are also minimal should the business fail. 1.7 Initial rent is agreed between the pub owning company and the occupier. Generally speaking the accepted method for the valuation of pub rents is the “profits basis”, which assumes that the occupier is an “average leaseholder”. Working expenses and any interest on any capital that the lessee has tied up in the business is then deducted from the gross profits to arrive at a “divisible balance”. This represents the income to be divided between the pubco and the lessee. The company representative will use their experience and trading knowledge of the pub to propose a rental figure and this may be balanced in certain circumstances in favour of the tenant to ensure that he or she has the ability to earn a living wage. 1.8 Lease agreements will normally contain provision for a rent review after five years. On review the fair maintainable rent will be re-assessed on the basis of the trading pattern of the pub and what could reasonably be expected of the business as it exists at that time. Things to be considered will be changes in demographics, capital investment by the pub owning company or the lessee, general trading conditions and any other relevant factors that have an influence on the revenue of the pub. The rent is then agreed between the parties but if no agreement can be reached, it is open to either party to seek arbitration through the accepted channels (RICS Code of Practice “Red Book”). It should be noted that pub rents can go down as well as up. 1.9 Rent reviews are generally scheduled to occur every five years during the term of a lease. However, on assignment, a new lessee may be faced with a rent review in a shorter period of time due to the rental term of the original lease having expired.

2. Changes to the pub sector since the 2004 Review 2.1 The pub sector has undergone considerable change since the 2004 Review and these changes have had a considerable impact on the profitability of all pubs. All small businesses, particularly those in the hospitality sector, have been burdened by compliance costs resulting from a raft of new legislation. This has included licensing reform, gambling laws, smoking ban, fire regulations and employment legislation. (See BBPA economic review “A Wake-Up for Westminster” attached to this submission.) 2.2 Licensing reform cost the sector a one-oV transition of around £95 million in additional costs of meeting new conditions imposed by licensing authorities. Annual fees are now amounting to around £40 million. The cost of variations to premises licences now run into several thousands of pounds resulting in significant on-going costs in terms of operator cash flow and company investment. The BBPA exercise in quantifying the DCMS simplification plans revealed that the cost savings estimated by DCMS have not been realised. 2.3 The smoking bans introduced in Scotland, England and Wales have resulted in further investment of around £100 million in tenanted/leased pubs in an attempt to retain trade by improving external trading areas. Nevertheless, wet-led community based pubs have seen a significant decline in sales since the introduction of the ban. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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2.4 In March 2008 beer duty was increased by an unprecedented 9.1% and an “escalator” was introduced to increase alcohol taxes by two percent above the rate of inflation per year for the next four years. This will further reduce alcoholic drink sales in the pub sector which are already seriously in decline. Conversely,there has been a significant growth in oV-trade sales through the increased expansion of oV-licence trading hours and a heavily discounted supermarket pricing strategy. In particular the 2003 Licensing Act has given much more accessibility to the oV trade and has been instrumental in accelerating a long-term trend towards drinking at home. 2.5 Over the last 12 months pubs have seen alcohol sales fall as consumer confidence has been eroded on the back of the credit crunch with rising costs of food, fuel, mortgages, direct and indirect taxes putting further pressure on disposable income and discretionary spend. 2.6 The cost of utilities (gas, electricity) has seen steep rises (increase of 30%) which has further impacted on the profitability of all pubs, in particular those that are trying to grow food sales to oVset the declining beer sales caused by oV-trade pricing, duty rises etc.

3. Assistance to tenants/lessees

3.1 During these diYcult times pub companies have spent around £35–40 million supporting their lessees to maintain viable businesses. (See attached press cutting (not printed here)). This support has included: — rent concessions; — special discounts and price trials; — landlord funded developments; — SKY TV subsidies; — free legal help lines; — free training on finance and marketing; — free websites for pub accommodation; — “pub doctor” business development consultancy; and — on-line services such as payroll, promotions, wine lists and food menus. 3.2 As BBPA members pub owning companies have also invested considerable resource, both through membership subscriptions and management expertise in fighting the legislative and commercial burden currently faced by pubs. Lessees have benefited directly from this support which has included judicial review of specific aspects of licensing law, challenging increased tariVs by PPL, gaining increases in machine stakes and prizes and vigorous defence of the pub in all dealings with Government and enforcers. The value of this support cannot be quantified in profit terms but has significant benefits for all pub businesses.

4. A Challenging Time for the pub industry

4.1 With a combination of spiralling costs and severe market conditions it is generally accepted that hospitality is a challenging sector with businesses that rely on discretionary spend. A BERR Report on business survival states that hospitality has one of the lowest business survival rates of all sectors. 4.2 Pub closures have climbed from two a week in 2005 to the record rate of 36 a week (five a day). With this background of increasing overheads, a toughening market and loss of customer confidence there is no doubt that some tenants/lessees are themselves feeling insecure and unsure of their long-term future. 4.3 On a more positive note, even despite the additional costs and diYcult trading conditions, the tenanted/leased model ensures that pub owning companies retain a vested interest in maintaining trading pubs and they have invested heavily to support their tenants through compliance with legislation over the last four years, continuous investment in developing pubs and latterly through a wide-range of financial concessions and business retention activity to dilute the full impact of the changing market. Pub owning companies have a vested interest in ensuring their pubs are occupied and trading well. 4.4 Independent free trade operators have a greater financial exposure with banks due to the size of equity required to enter the sector as a free trader. On the other hand a tenant/lessee is protected from this level of investment risk but the changing market and increasing overheads will no doubt result in an accelerated closure of failed pubs. 4.5 Despite diYcult trading conditions many pub businesses are continuing to thrive through innovation, diversification and creative marketing assisted by the advice and support of pub owning companies working in partnership with their retailers. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Trade &Industry Committee Inquiry 2004

5. The Tie 5.1 For nearly 40 years the tie has been the subject of scrutiny by competition authorities both in Europe and the UK and in all cases the rationale for, and the importance of, the property tie have been upheld. 5.2 Following the most recent and thorough review of the tie in 2004, the BBPA welcomed the Trade & Industry Committee’s conclusion that “the removal of the beer tie would not necessarily benefit tenants”. The tie continues to provide individual entrepreneurs with a low-cost opportunity to establish profitable pub businesses. 5.3 The “tie” is of crucial importance to the success and sustainability of the tenanted and leased pub sector. It is also fundamental to the survival of vertically-integrated regional and family brewers in the UK enabling them to sell their beer within their own estates and also to promote their brands within the wider pub market. 5.4 The BBPA would strongly argue that if the “tie” had been previously removed, tenants/lessees would be significantly worse oV today as the pub owning companies would have fully rentalised the drinks and machine “ties” in a much more positive climate. With a fixed rent they would not be sharing the pain of loss of sales and would have little interest in supporting their tenants through tough market conditions. 5.5 Pub tenancy/lease agreements provide diVerent business models enabling entrepreneurs to enter the sector as independent operators, with parallels to similar “tied” businesses such as food and drink franchises. However a pub tenancy or lease is far less restrictive than a typical franchise in that they provide the opportunity and flexibility for talented lessees to structure and model their own businesses using the free support and expertise oVered by the pub owning company. A franchise business in the food and drink sector requires a much higher level of investment at entry and franchisees must follow a strict business format using a package and products approved by the franchise owner. On-going management and advertising fees, on top of rent, are also often levied based on a percentage of annual turnover.

6. Conclusions and Recommendations 6.1 BBPA Code of Practice Framework: The principal recommendation from the Inquiry was that BBPA should as a matter of urgency revise its Code of Practice Framework to cover areas such as rent reviews, the role of business development managers, complaint and dispute procedures, disclosure and the availability of information, and the taking of legal and professional advice by prospective tenants. Mindful of the recommendations, BBPA commenced work on drawing up a new Code soon after the Committee’s report and, following extensive consultation with a wide range of individuals and organisations, published the revised and updated Code towards the end of 2005. (A copy of the BBPA Code is attached to this submission (not printed here).) 6.2 The Association believes that its revised Code fulfils most of the requirements of the Select Committee Inquiry. All member companies were subsequently invited to review their codes and revise them as appropriate in line with the BBPA’s new Code. 6.3 In reviewing the BBPA Code the following specific recommendations were addressed: 6.4 Role of BDM’s: A new section covering business support was inserted into the Code which included the role of BDM’s (or equivalent) and the level of support and professional guidance available. 6.5 Complaint and dispute procedure: Dispute procedures have been given greater prominence in the Code with BBPA oVering to take on the role of intermediary to resolve any misunderstandings. Since the Code was revised BBPA has received no request to act in this capacity. It is more customary for tenants/lessees to approach their professional trade bodies, ie FLVA or BII but it is our understanding from members that very few disputes have in fact arisen. 6.6 Disclosure and availability of information: This is covered by the Code which prescribes in greater detail the kind of information a lessee/tenant might be expected to receive. 6.7 Taking legal and professional advice by prospective tenants: Significant emphasis has been given to the importance of taking external professional advice on all aspects of the business. Companies emphasise this within their Codes and some require written confirmation that such advice has been taken.

Other Recommendations 6.8 Pub owning companies to allow their tenants more flexibility in their choice of the products they sell: Pubco lessees have an ever-increasing range of products from which to choose as well as the major brands demanded by customers. Major pub owning companies have also introduced schemes to allow a wide range of smaller brewers beer to be purchased by their lessees. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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6.9 AWP machine tie to be removed: A new section has been included that seeks to ensure that a full and transparent description of the terms of the machine is provided. The Association considered the Committee’s recommendation that the machine tie be removed, but it was concluded that the BBPA Code of Practice should not include a recommendation that companies should cease a legitimate commercial practice. This remains a matter for negotiation between the pub owning company and the leaseholder. 6.10 Removal of upward only rent reviews (UORR) from agreements: The BBPA Code now states explicitly that new leases should not contain upward only rent reviews. Leases inherited by a pub owning company that contain UORR’s will be documented and, in reality, rents are applied flexibly with some going down as well as up. (See also para 3.1 for details of further assistance provided to lessees.) 6.11 Assignment and surrender: The Code has new sections setting out the level of detail that lessees should be provided with on assignment and surrender. 6.12 Industry to review the support oVered to tenants by BDM’s to ensure the application of best practice in the provision of support to individual businesses: It is our understanding that companies have been active in reviewing their licensee support and many operate customer forums whereby a representative group of licensees hold regular meetings with company representatives to address issues of concern regarding the industry or the company itself. BBPA cannot comment on individual cases as these are matters between the pubco and the lessee/tenant.

2008 Committee Terms of Reference Here we address the specific questions highlighted in the BERR announcement of the Select Committee Inquiry:

7. Has the Licensing Act 2003 had an eVect on competition within the market? 7.1 The Licensing Act 2003 has increased competition enabling pubs to compete with other late-night venues but, whilst increasing overheads, it has not necessarily had a significant impact on volumes. 7.2 The cost of the new Licensing Act has been significant with transition costs alone amounting to £2,000 per pub. There have also been significant on-going costs for some pubs where the premises licence has been subject to review or appeal. There might also be restraints on the business as a result of conditions on the premises licence imposed either by the licensing authority or the premises licence holder. 7.3 A major consequence of the Licensing Act has been the ability of the oV-trade to sell alcohol during all permitted opening hours. OV-trade pricing strategies have had a major impact on the pub sector with customers choosing to spend more time at home drinking cheap supermarket beer etc. There is evidence that pub goers are pre-loading with cheap alcohol before visiting pub premises later in the evening. 7.4 The concept of “24 hour drinking” is a myth as there have been only 600 24 hour licences granted of which 400 are supermarkets. The additional length of pub opening times following licensing reform is on average 22 minutes. 7.5 The DCMS Select Committee has recently announced an inquiry into the eVects of the Licensing Act to which BBPA will be submitting evidence also. 7.6 The smoking ban has driven customers outside pubs and this has resulted in neighbouring residents seeking a review of premises’ licences on the grounds of public nuisance. This has made trading diYcult for many pubs without external smoking facilities and some local authorities have imposed unreasonable conditions resulting in increased compliance costs.

8. To what extent have revisions to the codes of practice framework met the Committee’s concerns? 8.1 The BBPA’s response is set out above.

9. To what extent are the Codes applied by the pub owning companies? 9.1 The BBPA’s Code of Practice Framework has been adopted widely by its members and to the best of our ability we believe the Code is working well. BBPA has received a small number of enquiries which we have been able to answer by reference to the Code. 9.2 In addition following the TISC Inquiry major pub companies representing over 22,000 leased and tenanted pubs have revised their Codes and sought accreditation for them by the BII (professional body for licensees). Many other companies are seeking similar accreditation. The BII Benchmarking and Accreditation Scheme has evaluated these Codes and “judged them to be a clear statement of the Company’s Code of Practice for lessees and tenants”. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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10. Is there a need for further regulation of the industry 10.1 We do not believe that any further regulation is necessary and if it were to be introduced, this would need to be applied to all commercial dealings. The brewing and pub sector is already highly regulated and further legislation would impose additional compliance costs on a struggling sector. 10.2 There is a danger that further legislation could well see pub owning companies simply operate as pure property companies and withdrawal from their flexible approach to business support and on-going investment which has made the British pub famous. This would be a retrogressive step leading to more business failures and pub closures at a time when the whole sector is under severe pressure. 29 September 2008

Supplementary evidence from the British Beer and Pub Association

Pub Statistics

Freehouses % 17,200

“Freehouses” could be either owned outright by the operator or leased commercially from property owners.

Total tenanted/leased pubs % 30,800

We have no information as to how many of these operate free of tie.

Managed (eg Mitchells & Butlers, Spirit, % 9,000 Wetherspoons)

Many of these will be owner operated but a significant number will not own the property and will lease the premises from commercial property owners.

Average price of beer in pubco tied pub, brewery tied pub, managed pubs, freehouses: We do not collect any data on retail prices—the average price of beer in the UK is currently £2.41 () and £2.76 (lager) (source: ONS). Factors aVecting price include customer profile, location style of pub and brand.

Pub closures, (source CGA Strategy* research) 36 pubs per week are closing. We have provided this breakdown from CGA Strategy data which is derived from their outlet index database and relates to pubs that have ceased trading. It should be recognised that providing breakdowns and detailed analysis of sub-sets always presents a risk when dealing with statistics. This would apply to this as much as any other data but there is no question that the rate of closures in all categories and regions is accelerating.

Tenure % of closures

Free % 55% Managed % 12% Non Managed % 33% We have no data about the number of landlords surrendering or forfeiting leases. (*CGA Strategy is an independent on-trade market intelligence company) January 2009 Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Supplementary memorandum submitted by BBPA We have consulted five member companies representing approximately 20,000 leased/tenanted pubs and as far as possible can provide the following response to Mr Binley’s three questions:

INFORMATION ON RENT REVIEW ARBITRATION: 2004-08

(a) what percentage of rent reviews go to arbitration? From the feedback we have received around 18 rent reviews went to full arbitration during the period 2004-08—approximately 0.3% of rent reviews undertaken during that period.

(b) what is the average cost of arbitration? The total average cost of arbitration is approximately £24-30k. An arbitrator may charge £8-10k to make an award—these costs are split 50/50 between the two parties. Each party may often then choose to appoint an expert to make a detailed submission to the arbitrator and comment on evidence submitted by the other party. An expert’s costs may also be around £8-£10k. Each party will try to mitigate costs by making confidential oVers to the other side ahead of the submission (this is known as calder bank oVer). After the arbitrator has made the award he reviews the confidential oVers and decides who has won the case. The arbitrator will often decide that the loser pays costs.

(c) what percentage of arbitrations are found in favour of pubco’s?

Approximately 70% of cases are found in favour of pubco’s. We have also been advised that disputes over rent reviews may also be resolved by the use of a “binding independent expert award” which is much less expensive. A Binding Independent Expert award is an alternative to arbitration and is written into many leases. It is fairly standard in all commercial leases. The lease would provide for the provision and the parties would agree to say that the decision would be binding. Even if it is not written into the relevant lease it can be agreed between the parties. RICS-qualified personnel can act as both independent expert or arbitrator—the diVerence is the set of rules they are working to (RICS website has details). The key diVerences between arbitration and independent determination are: 1. An arbitrator is bound by the Arbitration Act. The expert can act as the parties agree they want him or her to, so long as the expert agrees. 2. An arbitrator is bound by the Act to use only the evidence presented by the parties. The expert can bring his or her own knowledge into play. This makes it possible for an unrepresented lessee, or one who has no evidence to put forward, to get an independent review of their rent without incurring the cost of employing a surveyor to make their case as would occur at arbitration. 3. An expert is not bound by the rules of evidence that bind an arbitrator under the Arbitration Act. The expert can be more flexible about allowing evidence such as the lessee’s own trading accounts, which are usually excluded in arbitrations. 4. An arbitrator will usually give reasons for the amount of the rent award. An expert will usually just give a figure. 5. If either party thinks there has been a mistake in the award, the expert can be held personally liable for any negligence, but the amount of the award cannot be appealed to the High Court. It is absolutely binding on both the parties. Arbitrations can be appealed to Court. 6. The expert will charge an hourly rate for his or her time, and will bill it 50/50 to the parties. The award will not be released until payment is made in full. 7. The expert has no power to order either party to pay the costs of the other if there is a perception that either party “won”. In arbitration there is always the risk that the losing party can end up paying everything, which can be as much as a total of £25,000–£30,000 of fees. 8. The likely fee cost of an expert award would be about £5,000–£10,000. As reported to the Committee, the BII has been working on the development of a low-cost independent expert service which would be made available to their members. 15 January 2009 Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by BII

Background to BII BII is the professional body for the licensed retail sector and we represent the views of over 40,000 provisional and permanent members, including managers, staV, licensees and tenants from both the on and oV sectors. We are also supported by 53 corporate patrons, members and supporters who contribute to furthering our main mission which is: To promote high standards of professionalism throughout the licensed retail sector, to encourage new entrants into the industry and to help them develop their long-term careers. To provide all our members with high quality information, skills and qualifications to help them succeed in their business activities. BII is fully committed to maintaining the highest possible standards throughout our industry. All our statutory members sign up to our Code of Conduct, which reinforces the professional message that we deliver. We help to set and maintain standards through our wholly owned awarding body BIIAB, which develops and certificates a wide range of nationally-recognised qualifications specific to the licensed trade. These include training courses for bar staV, kitchen staV, premises managers, licensees, door supervisors and many more. All courses leading to BIIAB qualifications are delivered through a UK-wide network of training centres. BIIAB is accredited by the Qualifications & Curriculum Authority (QCA) and the Scottish Qualifications Authority (SQA) and is the UK’s 6th largest vocational qualifications awarding body. Over 1.5 million BIIAB qualifications have been processed so far. BII submitted evidence to the Trade and Industry Select Committee in 2004 in addition to this written submission, and stand ready to provide oral evidence to the enquiry. In particular, we wish to highlight various initiatives which we believe have a bearing on the issues currently under review; namely the BII Benchmarking and Accreditation Service, our national road shows on the rent review process and the BII Schools Project.

BII Benchmarking and Accreditation Services

Background BII Benchmarking and Accreditation Services Ltd (BIIBAS) is a not-for-profit company and is a wholly- owned subsidiary of BII. Many of our members feel that the licensed retail industry would be better protected if both parties in lease and tenancy agreements were to have a better understanding of the business relationships involved. Misunderstandings, lack of precision and ambiguity have in the past given rise to antagonism between landlord and lessee/tenant and very often this has surfaced in the political arena. To facilitate better understanding, BII, with the help of lessees/tenants and major pub companies, has formed a new wholly owned company, to independently benchmark company Codes of Practice in terms of clarity against criteria it sets. It does this through its two independent committees, the Steering Committee (sets the criteria) and the Benchmarking Committee (judges a code against the criteria). Codes of Practice are used by companies to tell potential and current lessees/tenants the terms of the business relationship on oVer and how that relationship will be conducted. Full details of the criteria can be found at www.biibas.com and are included with this submission.

Current Accredited Codes of Practice Since the inception of BIIBAS in 2007, the following pub companies have had their Codes of Practice accredited: — Punch Taverns; — Enterprise Inns; — Marstons; — Fuller Smith and Turner; — Trust Inns; — Batemans; and — Charles Wells. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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There are another five companies which are at various stages in the accreditation process: — Hook Norton; — Admiral Taverns; — Scottish and Newcastle; — Wadworth; — St Austell Brewery; and — Greene King. In this way the vast majority of leased and tenanted public houses are covered by an accredited code of practice.

Complaints Whenever complaints are received in relation to alleged breaches of accredited codes, the matter is taken up with the senior oYcial at the named pub company. Since the scheme started BII has had to investigate three cases, all of which were resolved to the satisfaction of the lessee/tenant.

Summary We believe the BIIBAS scheme is a major step forward in landlord/lessee/tenant relations. The accredited codes clearly set out the business proposition being put forward in a transparent and comprehensive manner. The Benchmarking Committee process is extremely thorough and in all cases the pub company has had to make significant amendments to ensure accreditation is achieved. The scheme also enshrines the right to withdraw accreditation if it is felt by the committee that the pub company in question has not carried out the stated undertakings within the code. The scheme has received wide publicity in the trade press since its launch and we continue to make all of our members aware of its existence.

BII Rent Review Roadshows As part of our support to members and non members we are currently hosting a series of events (styled as a roadshow), the subject matter of which is preparation for rent reviews. Attached is a leaflet which gives full details of the events (not printed here). The events are aimed at both lessees/tenants and also landlords, valuers etc. The objective is to help to ensure the lessee/tenant is as well prepared as possible and to gain an insight into how the pub company approaches this important negotiation. So far we are seeing around 100 attendees at each event however all our members will have access to the presentations, reports/summaries and calculation aids following the conclusion of the events. The trade press as well as our own BIIBUSINESS magazine are also carrying articles to ensure as wide a coverage as possible. The feedback has been very positive from attendees.

BII Schools Project Towards the end of 2007 we launched the BII Schools Project which was developed in response to the Government initiative to reduce issues linked to alcohol consumption by young people aged 13–16. The project raises young people’s awareness of the social, economic and health issues of alcohol, its harmful eVects and what constitutes sensible drinking. The project also highlights the growing importance of the UK’s hospitality sector, and helps bring careers in the industry to life. The BII Schools Project is a partnership which brings schools, parents and commerce together. Companies and organisations within the hospitality sector support the project through sponsorship and nomination of schools. The project has a number of strands, including on-line and paper based quizzes for use by teachers in class or as homework. These quizzes cover a wide range of issues relating to alcohol and the hospitality sector. They also include many case studies giving a true insight into the varied careers in the sector. The main academic component of the Schools Project is the BIIAB Level 1 Certificate in Alcohol Awareness. The project oVers various levels of involvement for companies to sponsor schools to take full advantage of the scheme. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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To date 43 hospitality businesses have pledged their support to the scheme, ranging from large pub companies (eg Punch Tavern and Mitchells & Butlers) to individual pubs. The BIIAB Level 1 Certificate in Alcohol Awareness is proving increasingly popular with unanimously positive feedback from teachers and students alike. The qualification is currently oVered in over 130 venues, 52 of which are schools and colleges. By the end of 2008, it is anticipated that over 6,000 people will have been through the learning programme and awarded the qualification. Hull College alone is putting around 4,000 students through this qualification within the next four weeks. Full details of the scheme are attached and more information can be found at www.schoolsproject.co.uk.

BII BENCHMARKING AND ACCREDITATION SERVICE STANDARDS

Topics to be included in Codes Standards to be reached 1. The Business Model The various business models for operating licensed premises should be explained. For lessees/tenants the partnership aspect should be stressed in terms of mutual dependency if relevant. 2. The Rent What rent is (eg amount paid by a willing lessee/tenant to a company for the establishment). The way rent is arrived at (eg based on the level of trade that can be maintained by a competent retailer). When rents are raised/reviewed, what factors are taken into account at review; obligation on lessees to provide the necessary information. The procedures for resolving diVerences. Whether rents are flexible up and down. 3. The Tie The significance and facts of the Tie should be fully explained. 4. The Property The following must be clearly explained: (i) the full facts (ie the condition of the building) and obligations on both sides; (ii) the insurance position; (iii) the need for new licensees to obtain independent surveys. 5. Signing up process and costs Importance of seeking independent advice (both legal and financial) should be explained. 6. Training Skills required to run licensed premises should be explained. The need to possess statutory qualifications should be made clear. Is a route to further training provided? 7. Relevant information What is provided should be clearly explained. (eg trading history) 8. Business Support Nature and extent of support should be clearly explained. 9. Arbitration Arrangements Should be clearly explained with costs where possible. 10. Assignment The facts and processes should be clearly explained. Criteria of judgment for the Benchmarking Committee All topic areas must be addressed and in the view of the Benchmarking Committee, present an adequate picture of the business proposition oVered as well as meeting the standards specified. 29 September 2008

Supplementary evidence from BII I have now heard from our legal help line providers. In the past six months they report that they have had 203 calls from members in relation to landlord/tenant issues. This of course covers a number of areas from simple queries as to their rights through to seeking help where they need advice on forfeiture. From a membership of over 15000 this is a relatively small number. February 2009 Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Supplementary memorandum submitted by BII

Committee to Revisit the Role of Pubcos Further to the Select Committee meeting on 9 December 2008 and subsequent telephone calls with the clerk I am writing in connection with the proposed BII Independent Expert Determination Service which Mr McNamara mentioned during the Select Committee meeting. For clarity I should point out that Mr McNamara left BII at the end of 2008 to take up another role as Chief Executive of the Alliance of Sector Skills Councils and I took over at BII in February 2009.

Background As the professional body for the licensed retail trade, our charitable aim is to raise standards in the industry and to educate members in all aspects of running their businesses. In communications with our members the issue of rent reviews has been raised as an ongoing and particular source of concern and unrest. As a response to this feedback, and following a pilot in June 2007, in the latter part of 2008 we held a series of events which were aimed at educating members (and non members) in relation to the rent review process. These events were supported by three of the largest Pub Companies and breweries and presentations were made by representatives from those Pub Companies, Chartered Surveyors and independent experts. They were hosted by the Morning Advertiser. During feedback and question sessions, it became clear that an area of concern was the dispute process when negotiations had reached an impasse. In the majority of agreements, when this situation occurs the options are to go to arbitration (in which case the losing party may have all costs awarded to them) or an independent expert is appointed. This latter method carries a fee which is divided between the parties. Both methods provide a binding outcome on both parties. Both methods can be expensive and in the latter case members have raised concerns in relation to the perceived independence of the expert chosen by the Brewery or Pub Company, despite that expert being a member of RICS. As a result of this feedback and at the request of our corporate members (ie the major Pub Companies and brewers), BII undertook to look into creating an Independent Expert Determination service which would have the objectives of being: — transparently independent; — at a relatively low fixed cost; and — binding on both parties. Such a scheme would facilitate all sides of the industry coming together to create a transparent, relatively low cost, binding outcome to one of the areas of most contention within the industry.

The Process The first stage was to set up a steering committee whose role it is to determine the feasibility of such a scheme and to consider how this would work in practice. The steering committee is made up of representatives from the Breweries, Pub Companies, Chartered Surveyors a BIII trustee (who is also a licensee), BII consultant and BII staV. This work is coming to a close and the conclusions are that an independent expert determination service which is completely transparent, relatively low cost (which is fixed at the outset) at the point of use and ultimately binding on both parties is workable and practicable. Once this work is completed, there will be a full proposal to place before the BII National Council who will decide if this is a project worthy of BII’s involvement and if so how this will be funded and resourced.

How would it work? What follows is merely an outline of the steps within the process. More detailed work is going on to underpin each of the stages to ensure the scheme is practical and legal. 1. The two parties (Pub Co and Licensee) fail to agree on the proposed rent review outcome. 2. They agree to use the BII Independent Expert Determination Service. 3. They contact BII who will appoint an independent expert from the list which has been created. 4. Agreements and deeds of variation are signed and the independent RICS expert carries out the review in accordance with the scheme instructions. 5. A decision which is binding is made and conveyed to both parties. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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The expert’s fees will be fixed and will be shared between both parties to an agreed formula and will be payable at the outset. It is proposed that the licensee’s share of the fee will be between £1,000 and £2,000 in accordance with a sliding scale based on current levels of rent and location of the outlet. As mentioned above this is an outline only and clearly there are significant issues surrounding each step and this is currently being determined and resolved.

Impact Currently the incidence of invoking the use of an arbiter or independent expert is limited to around five or six per annum for each of the largest of the Pub Companies. The reasons for this are usually the unknown costs and lack of confidence in the system by licensees involved in using either of these routes. Within the UK there are approximately 31,000 lessees/tenants and most are on a three or five year rental cycle. Therefore there are approximately some 7,000 potential rent reviews each year. Once introduced, it is anticipated that the scheme will be used on a more regular basis as they see a certain cost and independent means of settling the impasse of an unresolved rent review. We would estimate that the scheme could see up to 5% using this route ie 350 per annum. This is based on anecdotal evidence and also the anticipation that the recession will result in an increase of disputes as belts are tightened and every pound of expenditure will be the subject of much scrutiny.

Costs The BII’s role would be to administer the scheme. It is envisaged that this will involve the creation of a bespoke website to provide full information on the scheme as well as detailed instruction regarding how to apply, payment of fees etc. With an anticipation of 350 per annum there will also be a need to resource this level of take up and this will include staV costs and other disbursements. We would also need to maintain a managerial watch overseeing the administration of the scheme and organising and recording of steering group meetings. We estimate the requirement of a budget of around £100,000 per annum to ensure the scheme is adequately resourced.

Conclusion We believe this is a vital piece of work and one which will lead to a valuable improvement in the way in which rent reviews are finally determined where other means have failed to reach a mutually acceptable outcome. It will benefit the licensee by taking the unknown cost out of the equation. He/she will have the peace of mind that the valuer will be chosen from a BII panel of RICS experts and finally the decision will be binding giving a clear independent outcome. The Pub Company would similarly benefit by having a relatively quick outcome to any dispute regarding rent reviews. They would also know the costs from the outset. This would therefore be a win/win situation. As mentioned above, work is currently being undertaken to determine the mechanics of the scheme and has therefore yet to be considered by the BII National Council. However a key area for their consideration will be that of cost as outlined above. As a body of charitable status, BII must ensure it has the related income to resource any activity and to meet the likely expenditure associated with it. As the scheme depends on low cost at the point of use and therefore does not include an income for the administration, our recommendation would be that consideration be given by H M Government to fully fund the scheme as outlined above. 27 February 2009 Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by Business in Sport and Leisure

Introduction Business In Sport and Leisure (BISL) is an umbrella organisation for over 100 companies in the private sector of sport and leisure industry. Members of BISL listed on the London Stock Exchange and in private equity ownership have a combined market value in excess of £40 billion. BISL has a long established working group on liquor licensing and published its first paper on licensing law reform in 2003.

Has the Licensing Act 2003 had an eVect on competition within the market? BISL is not aware of the Licensing Act 2003 having any impact on competition within the pub market. We do not think that any competition concerns have emerged since 2004 when the OFT and Trade and Industry Select Committee found none. However, we would like to note that despite the Licensing Act 2003 initially being envisaged as a deregulatory piece of legislation, its impact has been to increase the administrative burden for operators in the licensed trade, for example through requirements around advertising and applying for variations in licences. The local nature of the Act has resulted in widespread inconsistency of application by licensing authorities with some imposing unwarranted but punitive conditions on licences and others building strong partnerships with the licensed trade.

To what extent have revisions to the framework codes of practice met the Committee’s concerns? Revisions to the framework codes of practice have adopted most of the recommendations of the Trade and Industry Select Committee, for example on the avoidance of upward only rent reviews, the disclosure of information and the taking of legal and professional advice by prospective tenants. BISL understands that the Pubcos place a premium on ensuring the transparency of their lease agreements. Pubcos clearly explain the agreements that they enter into with tenants, providing for example complete guides to the letting and assignment process and plain English agreements with simple summaries. They also advise prospective tenants to take legal advice and insist that they take financial advice before signing the agreement.

To what extent are the codes applied by the pubcos? BISL believes that the recommendations of the Committee’s 2004 inquiry have been met, with Pubcos applying the amended codes of practice, on rent reviews, support for tenants, for example through BDMs, disclosure of information and requiring professional advice for prospective tenants. In the current diYcult economic climate, several Pubcos, for example Greene King and Enterprise Inns, have seen profits fall as they bolstered their tenants through rent concessions and trading support. As discussed below BISL believes this is indicative of how the present relationship between pub companies and tenants is working well by sharing the costs of the economic downturn.

Is there a need for further regulation of the industry? BISL is of the firm opinion that the last thing that the pub industry needs in the current diYcult economic times is any more regulation. There are many reasons for the current problems that pubs are facing, not least the eVects of the smoking ban, aggressive supermarket discounting and loss-leading, the rising cost of utilities and raw materials, the credit crunch and the resulting downturn in consumer spending and punitive taxation increases, particularly on beer duty. We certainly do not feel that the role that Pubcos play in the industry is driving pubs to fail or the root cause of the estimated 36 pub closures a week. Indeed, we believe that the flexibility that Pubcos have been able to operate over rent concessions and the support services their provide is helping rather than hindering their tenants and lessees. BISL is aware of the recent campaign attacking the relationship between Pubcos and tenants, in particular the beer tie. In 2004, the OFT and the Trade and Industry Select Committee found that there was no fundamental case to answer on the beer tie. BISL firmly believes that that situation has not changed and there are no competition concerns. There are in fact several significant benefits to the beer tie, for example the initial capital investment required by new lessees is lower and the pain of tough conditions is shared, with tenants more likely to receive support from a landlord with a vested interest (ie a Pubco) than from a bank calling in loans. Under the tie, beer prices increase only once a year rather than at any time as for free traders, with Pubcos operating transparency over the increases. Moreover, Pubcos have a vested interest in growing sales through providing a high level of support. Punch Taverns, for example, provides its lessees with marketing support, training, specialist help, not least the £40m invested in smoking ban adjustments across its estate, and financial help and support, such as rent concessions. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Rent is a fixed cost whereas beer costs are variable. Tenant and lessee beer prices are higher than for freehouses but the prices are clearly set out in writing in advance and, more importantly, the whole model for a free trader is diVerent. Free traders borrow from a bank to buy their pub whereas the Pubco finds the capital to buy a pub and establishes its beer prices against this cost, whilst investing in the pub through, for example, refurbishment. The beer tie enables Pubcos to keep rents lower than free market rates and there seems little appetite amongst tenants for rents to rise. Enterprise Inns, for example, have noted that only a small percentage of their tenants have opted for their Retail Partnership Agreement, which oVsets lower beer prices against a higher rent. Support services and advice are also available from the Pubco. Without the beer tie, rents would rise and investment in support services would decrease. 29 September 2008

Memorandum submitted by Marston’s Pub Company plc

1. Marston’s Pub Company (MPC) and The Pub Sector 1.1 The British Beer and Pub Association (BBPA) Submission provides separately details of the structure of the market and the type of tenancies and leases that are generally available. 1.2 Our agreements are highly flexible and are written in Plain English (carrying the Crystal Mark), a unique approach to clarity in this sector. Our 1,722 tenanted and leased pubs are spread across England and Wales but with a concentration in the midlands and the north of England as a consequence of historical development. 1.3 Approximately half our estate is leased on long-term agreements, with the remainder let on a variety of short-term agreements of up to five years in length. We do not have a preference for one style of agreement over another; rather it depends upon the nature of the pub. Each agreement is thus tailored to the specific requirements of our retailers. 1.4 As with other similar agreements, leases provide the opportunity for longer term investment and retailers can benefit from an increase in the value of the lease as a result of their eVorts, realising the goodwill or equity generated by assigning the lease. The retailer is responsible for repairs and redecoration of the premises. Tenanted agreements on the other hand are shorter, non-assignable and do not carry goodwill. The repair obligations are usually less onerous for the retailer. 1.5 Any tenanted/lease agreement is a commercial agreement that is signed by the operator at the start— from a tenanted perspective they are not forced to enter the agreement and the fundamentals of the agreement are not amended once the retailer is in place. We expect and encourage retailers to undertake careful due diligence as described in 4.10 below. 1.6 Tenanted pubs represent a cost-eVective way of setting up business. The terms of a tenancy are understandably diVerent from those enjoyed by a freetrader, who may have invested £500,000 or more buying their business. The costs, operating flexibility and limitations (such as the operation of the tie) compare very favourably with other franchise operations common to food and drink retailing in the UK.

2. Current Trading Climate 2.1 The BBPA have provided BEC with a summary of the current trading climate. It is worth reinforcing their submission with our view as tenanted operators with a very good understanding of the pressures currently aVecting our retailers. 2.2 The smoking bans introduced in England and Wales have severely aVected trade in many pubs, especially those without the facility to provide an attractive outside area for smokers and/or with a limited capacity to oVer food. MPC invested approximately £10m to help our retailers prepare outside trading areas. 2.3 UK on-trade beer volumes are estimated to have fallen by at least 10% in the last 12 months. This is the highest rate of decline on record. Weak consumer confidence and increased pressure on discretionary expenditure is having a direct impact on trade and profitability, as are rising costs, utilities, wholesale prices, wages, legislation compliance and increased taxation. 2.4 Pricing is a key issue for all pubs, with significantly increased competition from the oV-trade (supermarket, oV-licences). The exceptional increase in duty in March 2008 has exacerbated the price diVerential. The often quoted loss-leading 50p per pint of strong lager sold in supermarkets is unfortunately a reality. OV-trade outlets can sell below cost, abrogating any responsibility for supervised consumption. 2.5 Income from fruit machines (AWP) is in long-term and accelerating decline. This is an important source of income for many retailers. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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2.6 We have seen an increase in the number of pubs failing as a result of the combination of these factors. As a consequence, we have a greater number of pubs where the retailers are receiving assistance with rent, and higher discounts. We are spending over £2 million this year in rent and discount support—more than twice the level of 2007. We also have more pubs closed (either temporarily or permanently) than we have previously experienced. A number of these may be sold de-licensed, never to re-open again as pubs. 2.7 Because of the most diYcult trading conditions for many years we are working very closely with our retailers. It is in our interest to have stability in our tenanted estate. We continue to provide a high level of support in terms of marketing, business development advice as well as practical financial assistance.

3. Our Assistance to Tenants/lessees This is not an exhaustive list. Specific details, including examples, references and documentation or website access will be made available to Committee Members upon request.

3.1 Rent concessions 3.2 Price trials in South Wales and Stoke with higher discounts given to tenants/lessees. 3.3 Free legal helpline to cover areas of concern such as licensing and employment law. 3.4 Comprehensive training, including free training on finance and marketing to 360 pubs. 3.5 On-line payroll bureau facility oVered to all our tenants (1700!) at significantly reduced cost. 3.6 Significant investment in a wide range of on-line services, including promotions, wine lists, food menus. 3.7 Smoking preparation, including capex, project management, planning permissions, etc. 3.8 Free website for pub accommodation. 3.9 Sympathetic view taken for early surrenders where this is the only course of action. 3.10 “Pub Doctor” intensive business development consultancy. 3.11 Free help with a wide range of compliance matters, eg fire risk assessments, DDA. 3.12 Subsidised membership of trade bodies. 3.13 Facility to buy food from Marston’s PLC suppliers on Group terms.

Trade & Industry Select Committee Inquiry 2004

4. The Tie 4.1 The “tie” is a long established and well understood commercial practice in the pub industry. Retailers are usually “tied” to their landlord for the provision of specified draught and packaged beers, and cider. Wines, spirits, minerals and fruit juices are generally not “tied” (although there are some “full tie” agreements which also “tie” wines and spirits). 4.2 Historically, the tie enabled brewers to secure distribution for beers brewed by them in pubs owned by them. A large proportion of beers brewed by, for example, Fullers, Shepherd Neame, Thwaites, Greene King, Marston’s and other regional brewers, are sold through “tied” estate. In Marston’s, around 40% of our beer brewed is sold through Marston’s owned pubs, and in smaller brewers this figure would be greater. If the tie did not exist many regional brewers’ businesses would be threatened. 4.3 Our view is that removal of the tie would benefit the lowest cost producers (national lager brewers) at the expense of higher cost producers (regional, local and family brewers). Removal of the tie could therefore lead to reduced choice to consumers. 4.4 The existence of “the tie” enables brewers and pub operators to set rents below free market rents, and to provide support services and advice to tenants. If the “tie” were removed, rents would certainly increase and investment in support services would reduce. 4.5 The “tie” has been investigated many times in the past, most recently in 2004 (Trade and Industry Select Committee Inquiry). 4.6 Both OYce of Fair Trading and the Trade and Industry Select Committee have clearly stated there is no fundamental case to answer. 4.7 The Chief Executive of the OYce of Fair Trading, John Fingleton, has recently stated: “The relationship between pubcos and their tied tenants has been examined in depth in the past, under both European and UK competition laws. The conclusion has been that tied lease and tenancy agreements do not raise competition concerns”. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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4.8 The Trade and Industry Select Committee report into pub companies in 2004 stated: “We were not convinced that the division of the wholesaling and property functions of pubcos, ie the removal of the beer tie, as advocated by many witnesses, would necessarily benefit tenants. We felt it likely that in the absence of the tie pubcos would exercise their contractual right to raise property rents to compensate for the loss of income from beer sales….(and) if brewers were free to supply all public houses on a wholesale basis it is possible that major brewing companies could achieve a dominant market position to the detriment of individual public house operators.”

4.9 Pub companies have adopted the recommendations of the Trade and Industry Select Committee and have amended Codes of Practice in line with recommendations—including the avoidance of upward only rent reviews.

4.10 Marston’s lease agreements are totally transparent, freely entered into by both parties. Contracts are openly and willingly signed up to and clearly state the terms, conditions and expectations. All Marston’s agreements carry the ‘Plain English’ mark for clarity. Marston’s also advises prospective tenants to take independent legal and financial advice before entering into an agreement—which has a cooling oV period of three months.

4.11 The problems in the pub market have not been caused by, nor are they being made worse by the tie. Pubs are suVering due to a combination of factors surrounding the economic downturn, the prices squeeze and specific legislation aVecting pubs. Aggressive discounting and loss-leading on alcohol by supermarkets is encouraging people to drink at home rather than in the pub, and the recent duty increase of 9% has contributed to this price diVerential.

4.12 In our view government legislation and taxation are contributing to problems in the pub sector: the eVect of government policy has been to the detriment of the promotion of safe, sensible and social consumption of alcohol.

5. Conclusions and Recommendations

5.1 BBPA Code of Practice Framework

The principal recommendation from the Inquiry was that BBPA should as a matter of urgency revise its Code of Practice Framework to cover areas such as rent reviews, the role of business development managers, complaint and dispute procedures, disclosure and the availability of information, and the taking of legal and professional advice by prospective tenants.

The BBPA revised its Code of Practice framework in November 2005 and the British Institute of Innkeeping (BII) subsequently set up a subsidiary, BII Benchmarking and Accreditation Services (BIIBAS), to review and accredit individual pub companies’ Codes of Practice. Marston’s Pub Company was amongst the first operators in the industry to have its Code of Practice approved by the BII. This Code of Practice sets out clearly how we aim to do business; how our charges and the tie work; how we calculate rents; and the support we oVer and what we expect in return. It also describes what tenants should do if they are dissatisfied with us.

Since we published the Code (every tenant has received one and it is freely published on our website www.marstonspubcompany.co.uk), we have had only two cases referred to us by the BII, where a tenant felt we had not abided by our own Code. In both cases the BII found in our favour.

5.2 Products

“In the absence of the legislative option we recommend that pubcos allow their tenants more flexibility in their choice of the products they sell.”

Over the past three years Marston’s Pub Company (MPC) has extended its range of products across all categories. We oVer all of the top lagers in the country, a significantly extended range of non-beers, including our recently re-launched wine range and our new soft drinks range. Our rotating guest ale programme oVers over 30 diVerent beers from the five breweries which we own, as well as a number of beers sourced from other national and local brewers. For those houses who need an even wider range of wines, we do have an arrangement whereby a specialist third party can deal directly with them, catering for their own specific needs. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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5.3 Arbitration Calls for pubco/tenant agreements to have “an inexpensive and eYcient system of arbitration with fully independent arbitrations or experts to resolve disputes without imposing legal costs on the other side.” Since 2004 Marston’s Pub Company has only had two cases of arbitration. Our BII accredited Code of Practise details a clear process in the event of dispute. For many years we have used an independent Rent Panel to help with rent setting and to ensure that our rents are fair and in line with the market. We have also added in an extra “parachute” stage whereby we co-fund an independent expert to help resolve any disputes before they actually reach the expensive, formal arbitration process without prejudicing our tenants’ rights.

5.4 Assignments Pubcos should insist tenants assigning leases give prospective tenants the same level of information the pubco gives. Incoming tenants “should not sign agreements until they are aware of an incumbent’s profit- and loss accounts.” Our policy has always been to make sure that the assignee is made fully aware by the assignor of the fullest possible information from the pub’s profit-and-loss accounts. We therefore strongly recommend that all assignees take independent professional, legal and financial advice when entering into a business agreement/ contract with the assignor. It is essential the incoming tenant makes sure he or she has all of the information from the assignor. We do not know everything that goes through a pub’s books due to the nature of non- tied items such as food sales. Therefore, MPC insists the assignee asks for this information and has it checked before taking the lease on.

5.5 Advice “We believe that many of the disputes that arise between pubcos and their tenants would be eliminated if pubcos insisted as a condition of acceptance that tenants obtained all necessary professional advice.” This is already built in to our tenancy and lease agreements. We insist that new assignees take full professional, legal and financial advice before taking on a pub. In addition, we insist that all new retailers take up a subsidised Stock Taking service for at least their first year, to address one of the key reasons for pub business failure. We also include a cooling-oV period for three months in our agreements, which allows tenants an early break of agreement if they are unhappy with the pub or our trading relationship. We oVer a wide range of professional training courses to tenants and insist that they take our subsidised five-day entry level business and pub management course.

5.6 Discounts “We believe pubcos should advise their tenants of the average discount they receive, how this compares to the free-market discounts available, and how much of this discount pubcos are passing on to their tenants.” Our retailers receive full information on exactly what products are on oVer to them and what discounts they will receive. Our Intranet provides our customers with details of all discounts that they receive. For those customers who earn discounts related to achievement versus target, we update them on a weekly basis of their individual performance following a redesign of our invoice. Our customer services team also advise retailers if they are nearing a discount threshold at the point of order, giving them every opportunity to earn. We do not provide information on free trade discounts but our discount schemes have been considerably simplified. It would be commercially unacceptable to reveal our buying-in terms on our factored products, as the matter is commercially sensitive.

5.7 AWP Machines “We recommend the AWP machine tie be removed. If the AWP machine tie is not to be removed quickly, there is no reason pubcos could not introduce more transparency about their contractual relationships with their AWP operators.” The AWP tie remains a fundamental part of our relationship with retailers. We believe that this tie adds value to its tenants’ business due to the provision of better machines that are more appealing to customers, have better service and, therefore, generate higher revenue for the tenant. MPC continues to supply extra support to tenants, to ensure that they make the most out of the AWP machines. Our service covers all the legal, licensing and other legislative requirements with operating AWP’s. Our dedicated team analyses the performance of each machine on a regular basis to ensure that the machine operators regularly update the machine oVering in each pub. Where appropriate, we also give advice on the best location for AWP’s and relevant laws. The relationship between the AWP supplier, MPC and the tenant is transparent. Each tenant can see the rent payable on the machine and there are no hidden rebates. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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5.8 Rent Valuation Calls for “clear guidelines for the rent valuation process”. The profit assessment method of calculating rent should be carried out in accordance with national accounting standard. Pubcos must tell tenants how the rent was calculated.” We have a rent valuation process, which is executed with knowledge, prudence and due diligence. We aim to have an open relationship with our retailers and understand their true turnover and costs so that we can best evaluate their rent. Rent is evaluated by our professionally qualified Regional Estate Managers (REM’s). Using their profit-and-loss account, the retailer is taken through the business model with the REM to determine a fair rent that takes into account achievable turnover and costs. In the case of a dispute an independent valuer will visit the site, to decide whether it is fair or should be adjusted. The figure reached is then presented back to the retailer, who can accept or reject the oVer. As said earlier, we have had two cases requiring arbitration in the last five years.

5.9 Upwards Only Upward-only rent reviews should be removed “as soon as is practicable”. We agree. Our new lease agreements do not have an upward-only rent clause and older legacy agreements will be removed over time. In these instances we always take a fair view towards the evaluation of rent. Rents do go down in certain circumstances.

5.10 Exploitation Pubcos should “recognise that they have a responsibility to ensure they do not exploit their position of economic strength.” This continues to be a fundamental part of our business. We pride ourselves on the fact that, our business is built on transparency, openness and fairness.

5.11 Rent Help Recommends rent concessions “where tenants experience financial diYculty through no fault of their own, for example due to demographic changes” or because the pub is closed for repairs. We already do this. If a retailer has financial diYculties through no fault of their own, we will look at each case on its merits and award reductions or alleviate rent until the diYculty is resolved. A recent example of this includes the significant amount of assistance provided to retailers during the flooding in 2007. This even encompassed business interruption insurance.

5.12 Training Pubcos should consider paying course fees, or giving grants, to tenants who attend courses such as those run by the BII so they can employ cover staV while they are training. Training is fundamental to our business and we have always subsidised our training courses to our customers making them highly aVordable. For those courses which we do charge, we are highly competitive and have not changed our prices for over four years and have no plans to do so. We have significantly extended the range of training available to cover an increasing range of highly relevant topics and we now provide training on a local basis across over 20 diVerent geographical locations, making training more accessible. The majority of new training events are free of charge, and we invest a considerable amount of eVort, to encourage our retailers to take the opportunity to attend. We have extended our training in pubs to help new starters, pre-refurbishment reopening or kitchen training. All of these events are either free or heavily subsidised. In extreme cases, where we are unable to oVer local training, we contribute to the retailer’s expenses.

5.13 BDMs “We recommend that the industry should review the support oVered to tenants to ensure the application of best practice in the provision of support to individual businesses.” We have introduced a minimum call cycle of one visit per eight weeks. The call includes review forms for business development and retail standards, which require sign oV from both the BDM and the retailer, to ensure we are jointly identifying and agreeing business development actions and following them up. In addition to this, we are in the second year of developing our BDM’s by training them via the BII Profitable Business Portfolio Certificate and Diploma. This will ensure our BDM’s have a minimum level of skill Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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through an industry accredited qualification. We believe we are the only pub company oVering this type of development programme for our BDM’s. In addition, we have an industry-leading ratio of BDM’s to pubs, meaning we are able to dedicate more time to helping our customers than other pubcos.

5.14 Support “Pubcos should ensure a higher level of sales support and service is provided to tenants than they might achieve on their own.” The terms of these and details of consequences should form part of tenants’ In addition to our network of BDMs, we have an extensive team of support staV, including, surveyors, beer-quality technicians, machine support, food development support, marketing, and customer services, all geared towards supporting our retailers. Because we run over 500 managed pubs we have wide access to purchasing power and expertise which we apply to our tenanted business. Our monthly Bar Runner promotions magazine and our intranet site provide regular product promotions and heavily subsidised promotional mechanisms to help drive turnover. With our programme of capital investment, we provide a project manager to ensure that works are completed on time. The manager works closely with the retailer to ensure that their operation is geared towards maximising the new opportunity. Our scale does allow us to organise a network of suppliers, to help support our retailers without any obligation either way. The level of take up is evidence that this is a real benefit to all parties. This applies across all types of service, be it utilities, food, or the provision of covered smoking areas in over 1,000 of our pubs prior to the ban. We have invested heavily in technology to support our retailers; examples include the new CRM (customer relationship management) system which helps us chase the progress of contractors in our estate and also the launch of the online payroll system which enables our retailers to produce payslips at a fraction of the cost they would normally pay.

5.15 Balance For some tenants, the cost of the tie is not equal to the benefits. This leads some tenants to get into financial diYculties. “In such cases pubcos could do more to redress the imbalance.” Our tenancies and leases continue to provide a way for an entrepreneurial retailer to take on a pub business at relatively low cost compared with buying a free house. We are flexible and will release the tie, in whole or in part, depending upon individual negotiation with the tenant or lessee. As described above, the variety and level of support that we oVer our retailers has never been greater. We continue to work closely with our tenants, to ensure that they can enjoy a long term, sustainable business.

6. BEC Committee 2008 Terms of Reference Here we address the specific questions highlighted in the BEC announcement of the Select Committee Inquiry:

Has the Licensing Act 2003 had an eVect on competition within the market? 6.1 The Licensing Act 2003 has increased competition enabling pubs to compete with other late-night venues but overall on-trade consumption has fallen. Although the majority of outlets acquired the right to trade for an hour or two longer at the weekends, trade has simply shifted to later rather than grown overall. Costs, conversely, have increased as a direct result. 6.2 The Licensing Act cost circa £2,000 per pub to be implemented. This was a particular burden on smaller houses. In addition, compliance and capital investment, such as CCTV and sound-control measures have increased the burden. The on-going administration of licensing is now a specialist function which we sub-contract to a firm of licensing solicitors. Reviews and pub closures are now harder to avoid as a result of the onerous bureaucratic conditions (eg bankruptcy, IVA, deaths) within the Act. 6.3 In common with our competitors, we are seeing more competition from the oV-trade which has benefited from the ability to sell alcohol during all permitted opening hours following the introduction of the 2003 Act. “Pre-loading” with cheap supermarket alcohol before visiting pubs later is an increasingly common phenomenon and brings with it diYcult issues of anti-social behaviour. 6.4 None of our pubs have “24 hour drinking”. Our latest licence is 3 a.m.; we have 1% of our pubs with such late licences. 6.5 Power to residents and local authorities has increased as a direct result of the Licensing Act 2003. Smaller pubs are less well placed to handle the consequences of this and are being disproportionately aVected in comparison to larger, managed pubs. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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6.6 The Regulatory Impact Assessment identified savings worth millions of pounds. We have no evidence of savings as a result of the Act, either within our business, that of our tenants or in the local authorities with whom we deal. Indeed, the reverse is true; costs have increased as a direct consequence of the Act.

To what extent have revisions to the codes of practice framework met the Committee’s concerns? 6.7 Our response is set out above (5.1). Our BII-accredited Code was written within the framework of the BBPA Code of Practice that directly followed from the TISC recommendations.

To what extent are the Codes applied by the pubco’s? 6.8 We have had only two issues referred to us by the BII (see ¶5.1). 6.9 All tenants receive a copy of our Code of Practice; all staV are trained in it; the responsibility for maintaining the Code and monitoring its eVectiveness is the Managing Director’s and it is a core part of how we do business with our tenants.

Is there a need for further regulation of the industry The brewing and on-trade sector is already very highly regulated. Further legislation would impose further compliance costs on both us and our licensees. We do not believe that any further regulation is necessary. Plenty of powers exist already to control the industry’s activities. Ultimately there is no evidence that we make unusual or ‘super-profits’ from the operation of tenanted and leased pubs: our return on capital (reported in our annual results for the year ended September 2007) was 8.5%. 29 September 2008

Memorandum submitted anonymously I believe my recent experiences running pubs for one of the major pubcos is relevent to your inquiry into pubcos.

Brief History I have run four pubs over the last 24 years with the most recent being: The Swan at Nibley which was operated by Courage, Inntrepreneur, Unqiue and finally Enterprise Inns and I ran for 21 years. My tenancy finished in May 2008. The Frog & Bulrush which was operated by Enterprise Inns and I ran for five years. I sold my lease in February 2008. My main contention is the unfair position the tied tenant/leaseholder is in when trying to challenge the might of the pubcos and the often scandalous treatment of us. Prior to the introduction of the Beer Orders tenants belonged to tenant streams and LVA’s who championed our causes. Nowadays these are virtually non existent tenants being left to the mercy of pubcos trusting them to be fair. Unfortunately the only reason for pubcos existence is to pay dividends to their shareholders, treating tenants/leaseholders fairly is not a priority. Pubcos will argue that there is a legal discourse to settle disputes. This is not true. To be able to challenge using the legal system costs thousands of punds, something most publicans cannot aVord. There is little profit from running pubs nowadays. Usually failing tenants leave quietly having lost their money. New tenants have been easy to find oftent raising the ingoing or price of a lease by the sale of their former home or from redundancy payments. There seems to be a minimum figure of £30,000 which pubcos need to yield from a site irrespective of its profitability. They will argue that that should be the minimum wage for the publican operator and according to their calculations of 50% profit all should be well. The yardstick of 50% is not realistic in today’s market. The number of pubs currently closed as unviable were not on a “no rent level” but they were on a “no profit level”. In today’s trading conditions the publican is expected to comply with masses of legislation: Access for the disabled, minimum wages, maternity benefits, increased holiday entitlements, increased health and safety requirements, more onerous fire regulations and the smoking ban. This all needs funding. I purchased the lease on the Frog & Bulrush in 2003 which had a low rent of £15,000. I began the process of upgrading an old and shabby building. I was fully tied for beer and cider and had no guest ale provision. I paid full list price with no discounts. At my first rent review the proposed rent was £31,000 more than a 100% increase. Nothing had changed in the local environment or economy to justify such a rise. I braved things out and eventually we went to arbitration. The arbitrator ruled a little above the caulderbank oVer Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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from Enterprise Inns. Not able to make a realistic profit and being required to pay my legal fees together with Enterprise’s I sold the lease. I had no other option. I feel the arbitrator is not on the side of the struggling tenant but rather on the side of him who feeds him. They too have to live with the power these giant companies from whom they need to earn a living. I was an experienced publican who ran a busy pub which served food, was clean and tidy, had well trained staV but was not able to make suYcient profit. My other pub The Swan at Nibley which had also come under the Enterprise umbrella was due to have its non assignable lease renewed—formerly referred to as a tenancy. Having recent experiences of Enterprise Inns and having a period of ill health I decided not to renew my lease and gave nine months notice. As a sitting tenant I knew this was required and needed to be registered with the court. I was assured that there would be no problem reletting the pub on a long lease. A new tenant was found but decided not to proceed due to the transfer of undertakings obligation. Enterprise then decided to run the pub using a management company in the interim whilst they found another new tenant. On the day of changeover 19 May 2008 their representative met with the staV to tell them the pub would close for a few days whilst the management company found a manager. They were not to be paid but were laid oV and as such could claim benefits. I am not sure of the legalities of what they have done but I do know my ex-staV are taking me to an industrial tribunal to claim redundancy payments and unfair dismissal payments which will cost me £10,000 to defend and which I cannot reclaim as costs. Needless to say they have not been re-employed and the pub lies empty. The original new tenant will shortly be taking a lease on the Swan minus the staV; the whole exercise was to save themselves or Enterprise paying the transfer of undertakings and leave me footing the bill, approximately £35,000. This will use up my life savings. What a way for us all to be treated. My long serving staV should have been given proper notice and proper payment if they were not required by the ingoing tenant instead they lost their jobs overnight and I stand to loose the little money I have left which will leave me facing retirement penniless. The Government cannot have envisaged the outcome of the changes they made to achieve more choice for customers and to break the monopoly of big breweries but in the process they have created these monster companies which are ruining people’s lives and livelihoods. The old brewery tied tenant system was not without its problems and change was needed but what we have in its place is far worse. I speak from experience having worked with both. 15 September 2008

Memorandum submitted by Greene King plc

1. Overview Greene King is a vertically integrated brewer and pub retailer which has been based in Bury St Edmunds, SuVolk for over 200 years. It operates 870 managed pubs, hotels and restaurants across the UK with Pub Partners responsible for 1,450 tenanted/leased businesses in England and Wales and Belhaven responsible for a further 230 tenanted/leased businesses in Scotland. Greene King is recognised for the overall quality of its pub estate through both location and long-term investment. In particular, it is highly regarded for its licensee support programmes winning many industry and national training awards including becoming supreme winner at last years NITA training awards. Key to the success of the Greene King “model” is matching the right licensee to the right business with the right agreement to benefit both the licensee and Greene King as the landlord. To this end both the short- term tenancy agreements (78% of the estate) and long-term lease agreements (22% of estate) are oVered to reflect the licensees’ entry investment, security and value extraction opportunity. The total Greene King estate has around 60%, mainly very high quality, community based pubs which are ideal for new entrants to a self employed business under a tenancy agreement with a relatively low cost of entry averaging around £25k. The remaining 40% of the estate has a more destinational operating style (food, venue, etc) and is more attractive to experienced specialist operators who expect a longer-term lease agreement to reflect a higher cost of entry and investment. Even so many specialist operators prefer to remain with a Greene King tenancy agreement. The Greene King tenancy agreement is predominantly a three-year or five-year term protected under the Landlord & Tenants Act with annual RPI adjustments. The RPI adjustment is seen by tenants as preferential as it enables better financial planning over the term as opposed to a potential “hit” at review. Tenants are expected to purchase all alcoholic and mineral drinks from Greene King but benefit from external repairs and maintenance being undertaken by the company. The Greene King lease agreement is predominantly 15 or 20 years with five-year rent reviews and annual RPI adjustments. Lessees are expected to purchase all draught and packaged beers from Greene King but may independently purchase wines, spirits and minerals. Lessees take responsibility for the full repair and maintenance of the property but have the opportunity to assign the business to gain goodwill cash benefit. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Greene King strongly believes that such a mix of agreements is essential to attract the right people with the right skills operating the right pub and providing what their customers want. Greene King is actively targeting potential licensees, often with retailing or catering experience and, in particular, energy and ambition to make a career for themselves in the licensed trade. For them the low capital entry is extremely attractive. More experienced operators may be attracted to the lease model because of the financial benefit on assignment. The longer lease agreements clearly benefit successful destinational businesses although they may not be suitable for many community based ‘wet-led’ pubs for which the higher operational gearing associated with a lease can quickly become a liability to the lessee and, more importantly, the expected assignment value may not being realised. Such businesses are likely to be even more exposed in today’s challenging market. Greene King has a long tradition of working closely with its licensees to maximise the potential of each business for the benefit of both parties. Profit is derived from a subsidised rent, margin from the sales of drinks and in some cases a share of machine income. On average the annual gross income from each pub is around 10% of the asset value. With an average of 3% of asset value allocated to business overhead and licensee support it leaves around 7% to cover cost of capital to generate economic profit for shareholders. In Greene King’s view this represents a reasonable profit in that it reflects the capital risk on the asset. It is worth noting that many licensees will achieve an annual return of over 100% on their investment. In particular, over the last four years Greene King has seen increases in overhead costs, part of which is additional financial support to licensees to help them oVset the costs of increasing government legislation. The combination of the financial “model” and scale of economies ensure that Greene King can continue to provide industry leading support to its licensees. Any further legislation or restrictions on income will bring into question the viability of such support levels and ultimately the commercial justification of operating pub tenancies/leases. The Greene King tenancy agreement includes for a high commitment to the tenant through the diYcult first year in their pub. It includes on-going business reviews with their Business Development Manager (BDM), support of a Regional Training Manager, training programmes and business support. In return the tenant agrees to an “open-book” policy operated by independent accountants. During the first year both Greene King and the tenant have the opportunity to terminate the agreement. On satisfactory completion of the first year the remainder of the agreement term is honoured. This has resulted in each business being put on a sound financial footing and has been instrumental in reducing business failure in the first and subsequent years. An integral part of the strong relationships between Greene King and its licensees is the “Licensees Forum”. This is a group of 10 licensees who have been independently elected by their peers on a regional basis. They regularly meet with the Pub Partners’ Managing Director to discuss business issues and future plans. In addition, they act as a conduit for the escalation of any specific issues within their region. Further more, there is a direct line policy for any licensees to contact the Managing Director should they have a specific grievance which is not being reconciled at a local level. From a Greene King perspective it is important to put the current business climate into perspective: — over half of Greene King licensees are showing sales growth; — the biggest impact on even the most successful pubs is the significant increase in business overheads—duty, rates, utilities, staV etc; — there has recently been a higher than normal number of licensees giving notice, but in the last three months the number of new lets has exceeded these; — there is continued proactive support for licensees to help them through current trading diYculties; — “wet-led” businesses are being specifically supported with proactive added-value promotional activity allowing them to maintain their margins whilst oVering their customers “cheaper” beers in highly competitive markets; and — Greene King has not entered into any arbitration as part of the rent review process.

2. Greene King Code of Practice

Greene King was the first to introduce a Code of Practice in 1998 to ensure clear and transparent responsibilities for both parties as part of both tenancy and lease agreements. Since then the code has been updated as new agreements have been introduced. The company recognises a formal Code of Practice as vital to the reputable process of operating a Pubco and to ensure an open and honest relationship with its licensees. The Code of Practice has been updated three times to reflect changes to agreements with the latest version being launched in October 2008 (see appendix 5) Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Following the Select Committee’s 2004 report Greene King reviewed its Code of Practice and is confident that it more that meets the recommendations. In particular:

2.1 Pubco’s should allow their tenants more flexibility in their choice of the products they sell As brewers of traditional cask ales Greene King has a range of 20 own-brewed cask ales including Greene King IPA, Abbot Ale, Ruddles and Old Speckled Hen, as well a programme of 12 changing seasonal ales. A rolling programme of guest ales is also available every month. Alongside these there is a wide-range of market leading and specialist factored beer, lager, cider and stout draught and packaged brands on oVer. New products are continually introduced to respond to market trends and customer demands. For example subsidised McEwans lager, Ruddles British bitter and a value range of wines have been introduced.

2.2 Pubco’s should insist that tenants obtain all necessary professional advice as a condition of acceptance A “Royal Welcome” has been introduced which is a standard “Proposal for OVer” meeting which covers all contractual obligations for both parties. BDMs have a consistent approach with standard meeting agendas/contracts (See appendix 1) (not printed here) and formal training. Greene King insists that incumbent licensees take both legal and financial advice from a professional third party before taking an agreement. This is further supported by a comprehensive new licensee pack which outlines in detail all aspects of the business relationship with Greene King.

2.3 Pubco’s should advise their tenants of the average discount they receive and how this compares to the free market discounts available Each agreement is individual and based on both the business opportunity available and the skills of the tenant. Greene King provides a published trade price list and will provide details of discounts in writing if applicable as part of an agreement. Licensees interested in acquiring a free house are referred to Greene King’s Free Trade team whose discount package would relate to the level of financial support required— independent operators mainly only benefit from growth on their overall investment (see Appendix 2) (not printed here). Greene King does not publish its negotiated discounts as it is commercially sensitive information. The tenants’ business plan is based on the published Greene King trade price and they can compare retail prices with their market to ensure that they can compete and deliver suYcient sales and profit. Greene King then sense checks this and uses the information in future business reviews.

2.4 We recommend that the AWP machine tie be removed Since 2004 many pubs have repositioned to food and hence no longer have machines. In the remaining community based pubs the “tie” has been retained and additional manpower has been committed to increase focus in this area. Greene King believes the tenant is financially better oV as a direct result of this commitment to proactive machine management and its use of its purchasing power in negotiations with the best machine suppliers. If the AWP “tie” had been removed in 2005 machine income would have been converted to rent with licensees now paying in full for at least a 10% decline over the last three years. Retaining the “tie” has seen both parties sharing machine declines with Greene King continuing to have a vested interest in this joint income stream. Greene King does not include machine income in rent calculations.

2.5 Pubco’s should provide a comprehensive breakdown of how rent is calculated Greene King follows the RICS recommended guidelines linked to net divisible profit based on fair maintainable trade for the potential of each business. All potential licensees must provide a detailed business plan which is compared to Greene King’s estimated P&L model to ensure licensees viability. It is used to challenge prospective licensees’ income and overhead assumptions but as margins and variables are down to the licensee it can only be used as a guide. There is a distinct danger of potential mis-representation if a ‘guaranteed income’ was indicated. The licensees’ business plan (including P&L) is central to on-going business reviews between the licensee and Greene King’s BDM where performance against licensee projections can be continually reviewed.

2.6 We call upon those Pubco’s which have not already done so to remove upward only rent clauses as soon as practical The upward only rent clauses have been removed from all Greene King new agreements and it is not imposed on historical agreements. In response to the current economic climate, Greene King has generated considerable savings for its licensees through the freezing of numerous RPI rent increases. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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2.7 Rent concessions in cases where tenants are experiencing financial diYculty through no fault of their own is good practice Greene King works closely with its tenants and through this strong relationship can readily identify potential financial problems at an early stage. Such concessions have always been an integral part of the Greene King business in helping tenants through challenging times. To counter-act the current market downturn Greene King has increased the level of rent concessions to support its tenants.

2.8 Ensure the application of best practice in the provision of Business Development Manager support to individual licensees BDMs at Greene King have a close professional working relationship with their tenants. There has been significant investment in both industry leading management systems and training to ensure consistency of skills and transparency of decision making information to both BDMs and licensee. Local Recruitment and Training Managers have also been introduced in part to mentor and support licensees through their first year. The BDMs induction programme was recognised at the NITA Awards for 2006 and Greene King has also been recognised by the ALMR and Morning Advertiser for its high level of support in this area. In addition an independent NOP survey confirmed that 83% of Greene King tenants in their first year considered support to be fair to excellent.

2.9 Pubco’s should consider providing support to their tenants to attend training courses Greene King has a comprehensive industry leading training programme covering all aspects of the business with pub training centres across the estate supported by dedicated Recruitment Training Managers and Tenant Trainers. Tenant Trainers are experienced licensees who primarily support new entrants with in- pub training before they move into their business. This is further reinforced with access to a comprehensive range of on-line training modules for both licensees and their staV through the Pub Partners website. Key to the Greene King training programme is the compulsory “Go for Growth” programme for new entrants and tenants whose pubs are planned for capital investment. The course reviews tenants business plans and sets out measurable objectives which are then reviewed with their BDMs post occupancy/ development. The Greene King Training programme has received many NITA awards: — Best Licensee Induction Programme 2004 & 2005 for Probationary Year (2006-Highly Commended); — Best Development Programme 2005; — Best BDM Development Programme—2006; — Best Development Programme 2007 for “Go for Growth” training programme; and — BII Supreme Award 2007. Greene King believes, that as self employed operators, licensees should commit to training themselves and their staV as part of developing their business. This is fully explained before a licensee enters a pub and licensees commit to an ingoing training fund. Greene King’s role is to provide value-for-money leading training delivered by independent experts in business consultancy and training that makes a measurable diVerence to licensees in their business. In most cases training is subsidised and specifically developed for Greene King and is not available to external sources.

2.10 Pubco’s should ensure that a higher level of sales support and technical service is provided to tenants than they might achieve on their own Greene King has traditionally provided its tenants with a wide-range of industry leading support which was recognised when it achieved the highest industry accolade of Pub Company of the Year (100! pubs) for an unprecedented three times in a row (2001–03). Greene King licensees continue to benefit from an unrivalled support programme which is not available to a free trade operator. This includes: — Greene King was the first pub operator to launch exclusive web-based licensee facility which allows licensees to run their business more eVectively 24 hours a day. The website covers legal advice, the management of staV, service and standards guidelines, health and safety, training, detailed sales reports, marketing and promotional support. On-line ordering of drinks and third-party supplied goods is also available. — Significant discounts are available to licensees on food, utilities, equipment and many other products through the “Share & Save” initiative passing on the benefits of an integrated business with discounts negotiated by Greene King Retail. In 2007 licensees spent nearly £3 million in the scheme. For example, one supplier, National Energy Broker is currently reporting licensee savings of between 25% and 30%. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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— Marketing programmes are aligned to licensees ensuring all areas of trade development and repositioning are supported through a wide range of individualised posters, banners and foot-fall mechanics. Marketing and promotional support is available to licensees through a dedicated website. The launch of the recent “Cheap Round” promotion, where a discounted drinks activity with professional merchandising was provided demonstrates the flexibility of the Greene King approach, whilst directly supporting licensees with relevant trade building promotional activity. — Through Gerald Eve, Greene King provides a free independent business rate review service for licensees. The service includes the initial agency review and the management of submissions. From its introduction five years ago Greene King licensees have benefited by over £5.5 million in the reduction of business rates. — The specialist Property Management team advises on all aspects of property management. They are supported by the “Starline Plus” helpdesk facility, which coordinates maintenance and repairs and acts as a one-stop shop for all licensees enquiries. The floods of 2007 showed the eVectiveness of the team with every aVected pub being visited on the day of the flood, organising temporary water/services to maintain facilities wherever possible and pubs refurbished and re-opened at pace. — Whilst licensees are responsible for internal services, Greene King provides a Maintenance Service Agreement at a weekly cost of £20 which covers any major breakdown of equipment and services such as electrical, boilers, cellar cooling, filters etc. The licensee has the advantage of a one-stop shop for all repairs, confidence that Greene King will ensure quality equipment and work is guaranteed as well as reassurance of not having a big cash flow “hit” for replacement. — An on-going investment programme enables licensees to access funds to help them improve or reposition their business at a lower cost than through banks and other financial houses. Last year alone £18.7 million capital was invested in the estate and a further £4 million on repair and maintenance. The property team manages all aspects of the project from conception to completion including planning, licensing, design and project management—hugely time consuming and expensive for independent free house operators. In addition, licensees have no responsibility for arranging borrowing for the project. — Greene King’s industry leading training (as above) is only available to Greene King’s licensees. — A dedicated licensing team provides both legal and management advice and support on all aspects of individual and premises licensing. This has not only proved vital in protecting licensees’ businesses but also maximising the opportunities available. Greene King undertakes applications for variations on behalf of licensees on a cost only basis significantly below market levels.

3. The Licensing Act 2003 and the Effect on Competition

Whilst Greene King was a supporter of The Licensing Act 2003, the extensive red tape and increases in the overall cost base for both Pubco’s and licensees with no apparent resulting increase in sales, has been a disappointing outcome. Since its introduction, Greene King now employs an additional full-time licensing team of seven people as well as retaining a number of solicitors and a barrister.

As well as the ongoing costs, Greene King met the cost of over £2 million for the initial conversion in 2005. Further costs have also been occurred on the back of the Smoking Ban where variations for extending external hours were required in many areas and local authority restrictions needed to be challenged.

The flexibility that the licensing reform promised has not come to fruition. Many Local Authorities have brought in draconian conditions and impact zones diluting any potential opportunity and in many cases reducing trading hours. However, though stringent due diligence on the part of Greene King’s operations and licensing teams and its licensees, no premises licences have been lost and only six reviews have been conducted, all resulting in a positive outcome for Greene King’s licensees. In addition, BDMs have a key role in providing advice and using local contacts to help solve licensing problems before they escalate— saving licensee time and incurred costs.

Whilst most operators in the on-trade have faced similar challenges, thereby not really impacting on competition levels, the resulting impact from the oV-trade has been immense particularly around the additional freedom that the oV-trade has been granted under the 2003 Licensing Act. Whilst Greene King and its licensees continue to provide a controlled environment for the consumption of alcohol, a combination of increased alcohol availability and discounted prices in the oV-trade is more than counter- balancing the on-trades’ eVorts. Similarly, government, health lobby and media campaigns continue to operate a broad brush approach to the industry as opposed to focusing on the main problem areas—these are not tenanted and leased pubs that operate in the community and food area of the market in Greene King’s view. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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4. The Need for more Legislation of the Industry—Recommendations

Greene King firmly believes that any further legislation imposed on the on-trade will simply push the British pub into even more serious decline. The raft of legislation introduced over the last five years has already created undue red tape, additional costs and stress to individual licensees and has in some part been integral to the financial pressures they feel today. The level of support and financial aid provided by Pubco’s has been significantly escalated to meet the challenges licensees have faced. Greene King believes it has a long tradition of operating a good quality estate, attracting good quality licensees and providing them with an opportunity to develop their own business and make a profit. It makes good commercial sense to ensure that relationships with licensees are open, honest and transparent to ensure each pub has a sound business base. Further legislation will simply introduce more controls which will prevent such a relationship. Although outside the scope of the current BERR Select Committee review, much has been said about the fairness of the alcohol “tie” within the traditional Pubco tenancy/lease models and the need for legislation to remove this. Such legislation would put at risk the opportunity to provide a low cost entry point for a wide range of people to run a self-employed business. Companies, like Greene King, have a long and successful history of operating such agreements and its status as a brewer gives it a clear vested interest in the success of its pubs. The tied model ensures that licensees have the knowledge that a reasonable rent is charged for the business and both landlord and tenants share the benefits of growth through margin and, as is being demonstrated in today’s challenging environment, also share the loss when sales are declining. More importantly for Greene King licensees support, both financial and otherwise, is and will continue to be provided to help them through diYcult times and to grow their business in the long-term. Without the “tie” Pubco’s would simply increase the rent to cover loss of margin income and there would be no incentive to provide any form of support for licensees to eVectively run their pubs. More importantly, licensees would be responsible for the increasing cost of repairs and maintenance to the property. The loss of “tie” would further accelerate pub closures with the weight of legislation falling more heavily on smaller pubs, particularly community and village pubs, making them even more vulnerable in today’s market.

APPENDICES

Case Study A Andy Brookes, The Laughing Fish at Isfield Andy Brookes took a tenancy seven years ago with Greene King and it was his first self employed business venture. He was open to either a tenancy or a lease but could not aVord a freehold option. He is now grateful he chose the tenancy route which has provided him with substantial capital investment (£50k) in cellar works and service areas as well as extensive external repairs and redecoration by Greene King with no impact on his rent. Two further refurbishment schemes have had a rental impact but this has been at a much lower cost than personal borrowing and has ensured that the business has benefited from additional sales and a bright business future. He is equally happy that he chose the tenancy route because it allows him an easy way out of the business should he choose that, rather than a full repairing lease with diYcult assignability. Speaking about his experience, Andy says “I would recommend the tied tenancy model to any new licensee coming into the industry who requires the level of support Greene King oVers. The training is excellent as is the business development manager support. The Share & Save scheme saves me at least £1,500 each year and the online ordering facility provides me with more flexibility to run my business more eVectively. New licensees should take full advantage of all the support Greene King provides them”. He added, “In my experience having a well known brewer as well as pub operator and distribution under one roof provides me with excellent support. All my cellar work was done by their team and I never have a problem with beer orders and deliveries which is very important to me”. “The trade price I pay is higher than available on the open market, and of course I’d like cheaper beer, but I also understand and accept that this is part of the deal that I signed up to when I joined Greene King. The tenancy agreement, I believe, provides new licensees with a known rent for a business opportunity which includes a whole raft of business support”. Andy concludes that “I am delighted with the opportunity that I have been given and am now looking to the future. With my experience I feel confident to look at taking on a Lease Agreement and perhaps eventually investing in a Free House”. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Case Study B

Vernon Blackmore, The Anchor at Woodbridge Vernon took on the Anchor tenancy five months ago. He was looking for a central location in a busy market town. A freehold was not an option for him due to a combination of capital restraints and the shortage of freehold quality sites in such locations. Since taking on the tenancy, Greene King has provided expert advice in terms of developing his business and they are assisting him in improving the layout of the premises and external areas. Vernon said, “The training has been excellent, good value and, even though I previously ran self employed businesses, I have still learnt an awful lot more and would definitely recommend it to all new licensees. Having been in business before I look to increase profit through increase sales, their Go for Growth programme for new licensees taught me to focus as much on the cost base to improve profitability”. “The business development manager support has been superb giving expert advice when I need it, I only have to make one phone call and the problem is always sorted out straight away, leaving me with less to worry about and more time to concentrate on my business”. Vernon added “I think the product range provides everything I need for my business and even though I understand that the price is a little higher than on the open market I’ve accepted that as part of the deal”. “Greene King’s cellar service has been excellent with a real can do attitude. On two occasions I have had to call them out and without their prompt service my sales would have suVered. I am also a user of their Share & Save scheme especially the banking service which was a lot cheaper than I was quoted elsewhere”. “In particular, I am looking to improve the trading areas and I have benefited from a lot of free Greene King expertise and specialist advice that has allowed me to get the scheme I am looking for within my budget”. Vernon concluded “I would definitely recommend a tenancy to anybody looking to run a pub, having carefully looking at the location, property and the deal on oVer. My particular dealings with Greene King have always been very honourable and after five months at the pub the expected return on my business has risen 35% higher than my original forecast. This has been down to a lot of hard work on my part but Greene King’s support has undoubtedly made my journey a lot smoother” 29 September 2008

Memorandum submitted by South Norfolk Council

1. Background 1.1 At its meeting of 14 April 2008, members of the Tourism, Heritage, Enterprise and Culture Overview Sub-Committee at South Norfolk Council felt that anecdotally, there was cause for concern around the diYculties public houses in the area were facing. It was agreed that a Task Group of four members should be set up to examine the factors leading to the success or otherwise of pubs and consider what advice or assistance, if any, this Council could oVer licensees in the district. 1.2 The Task Group felt it was important that their consideration was based on evidence rather than supposition and so a questionnaire was sent out to all the publicans in the district, which asked a number of key questions. A summary report of those responses, is attached as Appendix One. 1.3 This Council is still examining this issue and, although not directly relevant to your investigation, councillors felt that it would be useful just to very briefly explain what we were doing. Following the questionnaire we are hosting a conference for publicans on Monday 29 September where a number of oYcers will talk about planning business rates etc and then two workshops on training and support, and marketing will be run. There will also be oYcers available during the morning, on an informal basis, to assist with any queries on smoking, licensing etc. 1.4 The Group has also listened to various external witnesses for example representatives from commercial estate agents, a local brewery and Enterprise Inns are coming on 29 October. Later this year, we intend to publish a report detailing exactly what practical advice and assistance this council can oVer publicans in our area. 1.5 The Council’s campaign to assist public houses in the district has received a great deal of attention in the media. The press release was picked up by the EDP, Diss Express and the Diss Mercury, all of whom ran it as a front-page story. The two main national publications for licensees, the Publican and the Morning Advertiser, were contacted and both ran the story on the front page of their website and also as a story in their printed magazines. 1.6 As part of my research, I came across your investigation into the role of the pubcos and councillors felt strongly that a response should be sent to you from the Council. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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2. Pubcos 2.1 The overwhelming findings from leaseholders in the area was that high rents were a major factor contributing to the lack of profitability and beer ties were also mentioned. In terms of your specific questions, the Task Group has not considered these aspects, as its role was more inward focussed, in terms of what this Council can do now, to assist pubs. 2.2 However, the overwhelming conclusions and comments relating to pubcos were as follows: 2.2.1 The basis for calculating rents. It appears that the major factor is how the rents are calculated. Pubcos are of course a property company whose profitability basis is secured on rising rents and the profits made from buying stock and reselling to publicans. The basis for calculation of rents should be on the existing trade not the future trade. If trade increases, then so can the rent, but to base the starting rent too high is counter-productive. 2.2.2 Publicans experience. Because the leasehold tenant route is a relatively low start up cost way into the trade, many of the applicants have little or no experience and the training oVered by most pubcos is not suYcient, particularly on the legal/finance side. 2.2.3 Upward only reviews. These should simply not be allowed as if trade falls significantly, it is counter productive to squeeze more rent out of a failing business. 2.2.4 Rent reviews. We feel it is vital that publicans should have agent/legal representation at such rent reviews and would need to actively “opt out” of having such representation, perhaps by signing a statement that there are aware of the risks of representing themselves. 2.2.5 Property values. We feel that many freeholds have been bought at an inflated price and the pubcos are now unable to sell their properties, without exposing this over valuation of their property portfolios. It may be the current financial climate will lead to an inevitable selling of some of the portfolio. 2.2.6 Property numbers. They simply own too many properties, bought a few years ago when property was booming. Perhaps the answer would be to restrict the number of pubs a company can own. 2.2.7 Assistance programmes. We felt that it must make economic sense for pubcos to have all pubs open and trading and thus some type of assistance scheme would be useful.

Conclusion 3.1 Although not directly related to your key questions, we hope this report assists the Committee in their deliberations.

APPENDIX ONE

REPORT ON THE PUBLIC HOUSES IN SOUTH NORFOLK QUESTIONNAIRE

1. Background 103 Questionnaires were sent out to all the public houses in South Norfolk on 8 July. 52 Completed questionnaires were returned which is a response rate of over 50%, which is way above the norm. An average response rate for surveys/questionnaires carried out by the Council is normally around 10%. The aim of the questionnair was to identify the actual factors aVecting the pub trade in South Norfolk to inform and assist the Task Group in suggesting options for advice and assistance. As one licensee put it, “Local people are increasingly valuing good quality service over cheaper chain style operations—an opportunity exists for rural pubs to get back to basics”.

2. Analysis of the Factors Affecting the Pub Trade The full breakdown of answers and every comment received is available if required, but to summarise, licensees felt very strongly, or strongly that the following negative factors aVected their business:

1. High Rent 97% 2. Supermarkets selling cheap alcohol 96% 3. Tax on alcohol 87% 4. Business rates 85% 5. The credit crunch 85% 6. The smoking ban 65% 7. Beer tie constraints 64% 8. Drink drive laws 41% Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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9. Legislation and red tape 33% 10. Second homes 12% The other issue mentioned many times was high overheads, especially electricity/gas/fuel (many pubs are on oil fired heating/customers having to drive—fuel costs etc). In terms of positive factors, licensees felt very strongly or strongly that the following factors increased their business:

1. Customer service 93% 2. Good food 87% 3. Location and passing trade 80% 4. Being child friendly 66% 5. Inclusion in guides, eg CAMRA, Good Pub 46% 6. Advertising and marketing 44% 7. Theme nights or quizzes etc 44% 8. Longer opening hours 34% 9. Diversification 32% 10. Special oVers, eg two for one 27%

3. Suggestions for Assistance by South Norfolk Council We had a huge number of responses to this, and some of the specific responses are as follows:

Signage — allow more on the roads—three separate responses on this; — allow “A” boards on side of road outside pub; and — more brown signs for pubs—four separate responses on this.

Rates — reduce business tates—18 separate responses suggested this; — continue with rural rate relief; — to assess rateable (non-domestic) value on a case by case basis; — reduce VAT rates for small businesses; — drastically reduce refuse collection charges; — reduce council tax on living accommodation; and — hep out with council tax.

Smoking — to be more helpful with advice on the smoking shelters; — allow my smoking shelter to remain where it is; — review smoking ban policy; — write to Government so pubs can become a smoking or a non-smoking pub; and — bring back smoking rooms—an opportunity to choose to be smoking/non-smoking would have been appropriate.

Planning — easier planning application process and reduction of costs for applying for planning; — help with planning consents for erection of smoking shelters and perhaps financial assistance for buying and erecting such shelters; and — grants for using local produce/beer.

Other Council issues — have all local pubs feature on a page on your website; — introduce a star quality rating for pubs (food outlets); — more help with diversification—in my case I believe a visiting post oYce/library/local councillors surgery/help with setting up a small general stores etc; Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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— crack down on pubs that are not complying with licensing and smoking bans; — encourage events and music festivals and beer festivals; — SNC could set up champions within the pub trade as examples of well run alcohol outlets; and — SNC could host a campaign based on promoting rural businesses in a positive light, pubs are increasingly being held accountable for the actions of their customers, ie noise etc, which to a certain degree is unavoidable. Pubs should be promoted as family friendly encouraging responsible drinking and social/community activity.

Members are invited to consider these suggestions along with any practical steps the Council could take.

4. Willing Witnesses to Come and Talk to the Task Group

There was a fantastic response to this request. It has been suggested that in view of the huge response, it might be a good idea to invite all the licensees who responded to perhaps a breakfast meeting where they can network, maybe have some workshops etc. In terms of other witnesses, I am pleased to report that representatives from Britannia Business Sales (East Anglia) Ltd, Adnams Brewery and Enterprise Inns have agreed to come and talk to the Task Group. 26 September 2008

Memorandum submitted by the Royal Institute of Chartered Surveyors

The Royal Institution of Chartered Surveyors (RICS) would like to comment on a specific area which relates to the Committee’s inquiry. While it is inappropriate for RICS to comment on the terms of inquiry which refer to competition within the industry,we recognise that responders may make reference to guidance on the valuation of licensed property when commenting on the details of the codes of practice, and it may be helpful for you to have advice on this.

By way of background, the RICS is the world’s leading professional body on all aspects of land, property and construction and associated environmental issues. As an independent and chartered organisation, it regulates and maintains the professional standards of 86,000 chartered members (FRICS and MRICS), many of whom are practicing land and property valuers. RICS represents, regulates and promotes the work of these property professionals throughout 146 countries and is governed by a Royal Charter approved by Parliament which requires it to act in the public interest.

In 2004 RICS submitted comments to the Trade and Industry Committee’s inquiry into pubcos highlighting the professional requirements demanded of a valuer of public houses. Although the questions put in your consultation do not directly impact on the method of valuation of licensed property, we hope the following points will be helpful to you: — All members of RICS providing valuations are required to comply with the RICS Valuation Standards. More specifically those Standards provide that the valuer must have knowledge of the particular market within which the property normally trades and the skills and understanding necessary to undertake the valuation competently. — Within these Standards, RICS has provided guidance on the valuation of what is called “trade- related property”, a term that includes pubs as well as other trades such as hotels, and petrol filling stations. For your information a copy of that guidance (GN 1 Trade related property valuations (not printed)) is attached to this letter. — In addition RICS has also published a Valuation Information Paper entitled The capital and rental valuation of restaurants, bars, public houses and nightclubs in England and Wales. A copy of that paper is also attached to this letter (not printed here). — Both documents are revised from time to time including some revisions made since 2004 when the previous enquiry took place.

Should any issues arise on your consideration of the responses that require clarification of the guidance RICS would be pleased to assist you. 29 September 2008 Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Supplementary evidence from the Royal Institution of Chartered Surveyors (RICS)

Comments following Oral Evidence Session on 18 November 2008 The Royal Institution of Chartered Surveyors (RICS) would like to oVer clarification to Mr Morgan’s comments on TISC recommendations at the inquiry earlier last month. Following the publication of the previous Committee’s report, RICS’ Trade-Related Valuation Group examined in detail the recommendations and concluded these were not issues which directly relate to valuation methodology; they relate primarily to the operation of the pubco business and the public houses that form part of that business. For this reason, we did not include the findings in our general guidance on the profits-related valuation method, because they were not appropriate, and not, as suggested, because we did not agree with them. The RICS Valuation Standards (the Red Book), and in particular GN1, follows the International Valuation Standards which relate to the profits method of valuation on a global basis. Valuation Information Paper 2 has also been revised to address certain rental valuation issues. Both these papers were sent to the Committee in our submission dated 26 September 2008. We hope you will take this into consideration in your final report and we would be glad to provide further guidance on this or other property-related matters. 1 December 2008

Supplementary memorandum submitted by RICS I refer to your letter of 13 March setting out some queries with regard to the recent Hearing. I am now able to respond as follows: 1. RICS, as a professional body, is mainly concerned with valuation standards. This involves both reporting and presentation standards and relevent experience of the member providing the valuation. The valuation standards are contained within a formal publication, The RICS Valuation Standards, which is an international publication, meeting the requirements of the international valuation standards set by the International Valuation Standards Committee. It is colloquially known as the Red Book. Within the Red Book, Guidance Notes are published to give greater clarity to particular forms of valuation, or valuations relating to particular types of property. The Red Book is only mandatory for members of RICS, it is widely consulted and referred to by other professionals. All members of the RICS must comply with the Valuation Standards when undertaking instructions, except where the instruction is not covered by Red Book matters, as stated within the publication, or where the client requires the member to deviated from the Valuation Standards, in which case the report must set out the extent of the deviation. Most rent reviews are not covered by the Valuation Standards as the rent review process is a matter of negotiation between landlord and tenant, taking into account the terms of the contract between the parties, as set down within the lease. There is no formal legal requirement that Chartered Surveyors must be involved in the rent review process. Indeed, quite often the landlord and tenant will discuss and agree matters direct. Chartered Surveyors are trained in analysing market transactions and apolying that evidence to specific circumstances. This may be capital or rental valuations, or rent reviews. Quite often pub companies have standard leases and undertake internal training of non-Chartered Surveyor staV, who deal with rent reviews as they arise. 2. GN1 of the Red Book relates to Trade Related property valuations. There are a number of diVerent valuation methods and techniques that are applied to diVerent types of property. Trading assets, where the property is either specifically built, or substantially adapted, for a particular business are invariably valued using what is known as the Profits Method of Valuation. The Profits Method is usually adopted for properties that are trading businesses, that usually change hands at prices related to the trading potential of the business. A wide variety of leisure properties, examples of which are stated within GN1, are valued using the Profits Method of Valuation. This includes fuel stations and cinemas. A considerable number of fuel stations are operated by way of lease with a tie to a specific supplier. This is therefore similar to the tied lease model adopted by many of the public house owners. The Profits Method of Valuation is widely used, as GN1 states, for hotels, restaurants, theatres and care homes. In addition, one could add a wide range of leisure facilities and businesses, visitor attractions, marinas, ports, etc. Also, the shopping centre market widely adopts turnover related leases which are forms of the Profits Method of Valuation. Thus, the profits method is not unique to the public house industry. 3. As stated in (1) above, RICS sets valuation standards. The appropriate method of valuation to be adopted by the valuer is largely determined by evidence of real transactions between market participants. It is important to understand that market valuation seeks to mirror real transactions in the market place, and not to ascribe values based on a set of preconceived assumptions. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Whilst the Red Book does not generally prescribed detailed methods of valuation we do publish a range of Valuation Information Papers which inform the practitioner of the common valuation approaches in the valuation of specific property types. There do not have a mandatory status, but are designed to provide best practice recommendations where a specific market approach is evident. If a particular method or practice was considered obsolete the VIP would say so. As stated in the various Valuation Information Papers, valuers should have relevent experience of the type of property that they are valuing and will therefore be fully aware of market transactions and how buyers/sellers and landlords/tenants appraise and negotiate transactions. March 2009

Memorandum submitted by Peal O’ Bells I wish to lodge my experiences for the inquiry into the eVectiveness of the Trade and Industry Committee’s Report of 2004. In doing so I wish to express my grave concerns as to the viability of many leased pubs, such as mine, which has seen profits inexplicably slashed this year, to a point where there is no longer any point in carrying on the business. My lease is dated from 1995, shortly before the latest amendments to the Landlords and Tenants Act, and originally drawn up by Paramount Pub Company. I became an assignee to the lease in September 2003, with the then current Pub Company Pyramid, who then sold to Admiral Taverns who are the current Landlords. My rent is on a RPI basis—it increases every three years at the rate of previous Retail Price Index. I am partially tied to beers, lager and ciders. Many factors have contributed to such a dire situation—the credit crunch, poor trading due to a non- existent Summer, eVects of the Smoking Ban, increased and more onerous Legislation, a Government hell bent on prosecuting the licensed trade—aimed particularly at traditional public houses, increased minimum wage and holiday pay, rocketing energy costs, and last but certainly not least, lack of sympathy (or more importantly monetary concessions) from our Landlords—the Pub Companies—in my case Admiral Taverns. My profits have plunged from a Net profit of £20,376 in 2005–06, to £16,662 in 2006–07, to what will be very close to a loss in 2007–08—with reduced drawings, currently standing at none whatsoever, no personal wages and the prospect of having to inject thousands of pounds just to pay September 2008 quarterly VAT bill. Despite such diYcult trading conditions, as mentioned above, my Pub Company Admiral Taverns, have actually increased rent, tried to charge me back rent to beyond my tenure, and forced me to become embroiled in a legal battle I could ill aVord. Furthermore, at the start of this diYcult trading period and before this rent “issue”, I requested financial assistance to help overcome a cash flow crises in January 2007. Nothing was forthcoming, and matters have deteriorated to such a point now, that my wife and I have taken on full time jobs away from the industry, our pub’s hours have been drastically reduced, we haven’t taken drawings or wages for three months, and we are having to bankroll the business to keep it afloat. Here follows are the subjects sub-divided, that I have direct interest in, and included are extracts from the 2004 inquiry, my thoughts on its conclusions and the eVect the recommendations had on the PubCos.

Rent Reviews

Inclusion from the 2004 Trade and Industry Committee Report

Section 8: Clause 151. We commend pubcos which have already removed upward only rent review (UORR) clauses from their agreements. We consider this best practice within the industry and we call upon those pubcos which have not already done so to remove such clauses as soon as is practicable.

Not a chance—those tenants sitting on existing agreements will be threatened with INCREASING rents, not decreasing, if the lease/tenancy was re-negotiated, as is the case with the removal of the Tie argument. It will be take it or leave it. Don’t forget, Tenants are poorly funded, time restricted individuals who are isolated in their fight against the might of the Corporate Company. Is it any wonder that so few go to arbitration? If any of the Pub Cos were willing to openly negotiate in front of this inquiry, to set a preciedent, if the formula for obtaining a Sustainable Rent were agreed between all the interested parties, this inquiry may have done some good. Up to that point, any further recommendations, slapped wrists, etc will be laughed upon by these “Bully Boys”, as they did following the previous inquiry. Only in the past six months has any “lip service” been paid to the buzz words touted in 2004, and that is only because of the shock of the re-opening of the inquiry, which was very much out of the blue. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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The Beer Tie

Inclusion; Section 8: Clause 133 The theory is that the net cost of the beer tie to the tenants makes them no worse oV than if they were free of tie. [171] Well it is ABSOLUTELY STIFLING to our operation and finances. The tie is strangling it’s tenants. It is a restrictive practice and results in a monopoly of supplies.

The Tied System Does this benefit the Consumer? NO, the same price cartel exists (because of the Pub Co’s tied prices to the tenant/lessee, who make up a large proportion of the trade) that was the prime mover for the Beer Orders in the 1980’s. Choice has increased, in that the there isn’t limited choice of Watney’s Red Barrel, or Whitbread Trophy, or whatever the National or regional Brewer in that particular area oVered. And lager choice has increased, but mainly the Global brands getting prevalence—not specialist Belgian or German styles. Does this benefit the Tenant? ABSOLUTELY NOT! The products are over priced—my G.P. on draught products is around 40%—to achieve any higher would put prices to a point where customers would desert to the freehouse in the village. Most tenants/lessees choice is limited to National and Global Brands (excepting those pubs allowed the SIBA scheme for cask ales), deliveries are non-negotiable, COD is Cash up-front, ordering up to five days before delivery, and paying up to four days before delivery, when delivery days are Monday or Tuesday. Stock control is near impossible, with the prediction of sales eVectively covering two weekends. If there are high sales, incoming stock the following week will be short, and when the Pub Co charge £70 for an extra delivery, or may fine or evict a tenant for “buying out”. Service is poor through the distributor Kuene and Nagel, with no complaint structure or means to “shop” elsewhere. Deliveries can be out of the declared time slot, they refuse to take all the “empties” and the crew changes week by week. The same draymen rarely deliver twice to the same pub. Hence we get calls asking for directions, they need explanation of the position of the drop, and need baby sitting in order to do their job. This was never the case under the old Brewery tied tenancies. Does this benefit the Pub Company? ABSOLUTELY. A subsidiary income on top of their rent—often outweighing the rental income. Estimating the Pub Cos bulk discount figure of £120/brewers barrel, (conservative estimate, given the buying power of the larger Pub Cos) mine is approximately £18,700 per annum. My current rent is £14,434 per annum on a turnover of circa £200,000. This may appear to be a favourable rent, and the tie is said to oVset below market rent valuation. But if rental calculations were performed on my business as recommended by the Committees Report 2004, I am sure my rent is reasonably fair, tie or no tie. Incidentally, I previously approached my previous Pub Co, Pyramid, for a free of tie agreement, and after studying my accounts they oVered a new annual rent of £44,000. As this was financial suicide on my part, I withdrew my request. This shows how much the Tie is worth to the Pub Cos. The financial penalties are dealt by the over inflated prices the Pub Company charges for it’s products. See below for examples:

Product Admiral price Wholesaler Price (Delivered) August 2008 Adnams Bitter 3.7% £82.01 £62.49 (Halls of Holywell) Marstons Pedigree 4.5% £95.53 £74.99 (Halls of Holywell)

Mainstream lagers and other products as negotiated by freehouses, can be as much as half the price of tied product list prices. They are not as declared in Section 7.117, “comparable with the free market price, if not a little lower than that available in the free trade if considered on an equivalent basis”. [149] Please compare to other Business models in our industry:

Non Tied Model: Take a Nationwide freeholder such as Wetherspoons: Benefits to the customer—Prices YES, well below average—and can be up to £1 cheaper per pint. Benefits in customer choice—yes there is wider choice especially for cask products and they are outlet manager controlled. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Benefits to the manager—YES—they get paid according to their ability. Benefits to the Pub Company—Wetherspoons are a highly successful company even in these diYcult trading conditions, but oVer value for money products.

Individual owned freehouses and small chain freehouses: Benefits—Products retail generally above Wetherspoons levels, due to reduced buying power, but Customer choice is unrestricted, and profits are directly related to the specific business dynamics. One stop purchase point, as listed by the Pub Cos as being a benefit to tenants—never listed as a disadvantage by any free-holder I know. Through the SIBA direct delivery scheme, I am allowed a “guest” beer maybe two a week. This is a non— profit making organization, acting in the interest of independent Regional Cask Breweries, to market their products in their local area via the Pub Cos. However, I have to pay around £20 per firkin above the Brewers wholesale price for the privilege. Does that benefit the consumer in any way? In choice yes, but there would be a greater benefit if more pubs were able to purchase free of tie, both in price and choice. Does it benefit the tenant—only in the availability of SIBA listed local cask products—but purchase price is too high and non-negotiable. Does it benefit the Pub co? Yes—£20 for every cask sold without having to spend one penny—money for nothing for their tenants “privilege” in ordering a “guest” or local beer. Does it benefit the brewer? Only in having their beers available in SIBA listed outlets—but they still have to sell it at a minimal profit and many micro brewers can’t aVord the membership fees.

Section 5: Clause 53. Marketing fees act as a deterrent to the extension of consumer choice and will usually be reflected in higher prices to the consumer. If pubcos are serious about extending consumer choice to include the products of small brewers they should reconsider their policy on marketing fees. If £20 per 9g firkin isn’t anything other than a “marketing or mark-up” fee, I don’t know what it is. Choice for the tenant (and hence the customer) is at the whim of the Pub Co, and their sales director. If the Company wish to de-list any product, they would do so based on trends National wide. They do not consider local customer needs—such as mild in Central and Northern areas, or strong local loyalties. If they decide to delist a product, we, nor the customer have a choice. And conversely, if an exciting new product was launched, and their was local following—it would be impossible for the tenant to sell it—hence loosing out to any local freehouse.

Service Provision

177. Dealing with tenants’ complaints quickly and eYciently is good business practice for all companies. Pubcos should ensure that a higher level of sales support and technical service is provided to tenants than they might achieve on their own. The terms of these procedures and details of the consequences should complaints and problems not be dealt with to the satisfaction of both parties should form part of tenants’ agreements or a binding code of practice. In my experience Very Poor: Cellar services—now a lottery as to who comes out to what equipment. I had to pay for flash chiller repair, as well as cellar cooling due to dubious clauses in my lease. On equipment breakdown—naturally during evening or weekend service, the oYce is closed—so no service is available. All that is oVered at other times is a phone number which we have to call to request the services of an engineer. No emergency number, no easily accessed lists, nothing. We are on our own—I’ve even had a fire in the cellar and called the oYce answer phone in a panic—I never even got a response. Also brought up in during my rent dispute, was the fact that the Admiral had failed to provide a Landlord’s Gas Safety Certificate, and consequently through their Solicitors, refused to do so, saying it was my responsibility. This matter is currently unresolved.

Buildings Insurance A fairly recent addition to the increasing number of financial burdens on the lessee, we are paying £1054.68 per annum. In the last week I have tried to make a claim for damage due to a burst pipe. On a type of pipe that shouldn’t have been installed (poly pipe dated 1972, usually installed underground) under floorboards, presumably during an extension commissioned prior to the start of the Lease—pre 1995). Admiral now inform me that there is an excess of £1,000 on this policy. The damage is not more than £1000, so I am now that amount out of pocket, from a policy I have no control over, and has never been sighted. Is that extortion or mis-representation—don’t know the technical term for it. It would be interesting for every Pub Co to declare the excess and policy charges, and to actually present the policies. My outgoing Dilapidations Report should be interesting. Having already spent £10,971.70 on repairs and renewals in the five years I’ve been Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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here, the property should be in excellent order. However, because of the age of this and many other Pub Co properties, previous poorly executed additions and repairs beyond my tenure and the present lease, I’m sure Admiral will use me to bring their property into such pristine state that it hasn’t been in for many, many years. This seems to be the norm as their profits shrink the value of their property drops, and their need to “screw” the tenant still further to the point of no return.

Training

Section 8: Clause 165. It is clearly to the benefit of both pubcos and their tenants that pubcos should encourage appropriate business training for prospective and incumbent tenants alike to improve their business knowledge and performance through courses such as those run by the British Institute of Innkeeping (BII). Some tenants who would benefit might be deterred by the cost. We suggest that as they would benefit from better trained and more competent tenants, pubcos should consider providing support to their tenants to attend these courses through the payment of course fees or grants to enable them to employ cover for the period when they are absent from the public house. Training and Support are the benefits touted by the Pub Companies as justification for the tie. Training is available, though written details and costs are not freely available, and the only oVering on the Admiral website is “introduction to Licensed Retail Operation and Personal License courses. No advanced training—no post application training—the 3 minute ‘How to Run it Your Way’ audio visual presentation is laughable if it wasn’t so misleading. ‘A quick overview on running an Admiral pub’. ‘Potential Landlords and landladies will find some useful tips here’”. SIC! Try speaking to existing tenants—they might shed some more light on the subject. At no stage does the video suggest taking legal or professional business advice— just let our BDM’s check your business plan and your away. Easy steps—nothing is easy and this shouldn’t be suggested—no reality checks, no true advice. More lambs to the slaughter—they presume the BDM is a true business advisor—nothing could be further from the truth in many cases. Support via the BDM is diminishing, their powers limited, and their resolution of matters contentious. More resources and power is given to the cellar police who inspect the cellars for breaches of tie. Any suggestions previously made by my BDM on business improvement had already been tried, and he has just been crunching figures to try to make a current loss, and no Income, into a healthy profit!! Fat chance. His P&L programme actually came up with an £8,000 per annum loss. He had no suggestions as to how to turn the business around, my prices were top end, turnover as good as could be expected, expenses not unreasonable. The rent based on net profit came out as £4000, the current rent compared to current turnover stood at only 7%, compared to an expected return of 12%. He agreed the business was loosing money, but could do nothing about it.

Arbitration

158. The pubcos have argued that if tenants do not agree with their rent assessment, they should not have entered into the lease or accepted the rent review.[211] We do not share this view. In the relationship between pubco and tenant, the tenant is in the weaker bargaining position. Pubcos should recognise that they have a responsibility to ensure they do not exploit their position of economic strength. All tenants should be treated fairly and rents should be reasonable and sustainable. My solicitor actually advised me against this Lease—but it was less onerous than most other leases I’d seen (he was not of pub trade background). The choice I had at the time was take it or leave it but there were extremely limited alternatives. Take a pub on the Pub Co’s standard lease terms or never take a pub. The Pub Co’s had the free house market sown up, the few that were available for sale were snapped up by these greedy operators keen to make a quick and a sustained long term killing (though due to the property crash, freeholds are now starting to appear, with Pub Cos unable to invest due to falling returns and the credit crunch).

Trade Self Help? One particularly unfair trading practice is actually administered by many of the Pub Companies and Breweries who incidentally also have Tenanted Subsidiaries, in the form of Managed Operations. Managed Houses have become less prevalent because of the financial benefits to the Breweries and Pub Cos to transfer such premises into Leased Outlets. Punch Taverns have transferred thousands of Spirit Group houses in such a way. Scottish and Newcastle, had and still have a substantial managed “wing”, as do Green King, Charles Wells, Thwaites, M&B, Enterprise, Marston’s and many others. These outlets purchase the Breweries products at drastically reduced rates compared to tenants rates, their heavily subsidized food prices (eg two meals for a fiver, two for one oVers, drink promotions) are beyond the pricing structure of individual tenants, and customers are naturally attracted by the same products oVered at prices that the tenanted outlets cannot match without loosing money. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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In Conclusion I have seen the “writing on the wall” for three years now, and have entered into correspondence with various “bodies” with an interest in the industry,but in the interests of trying to keep this submission concise, they will remain “on file”. All correspondence and details are available in full form if you require them, correspondents include BERR, my MP Ian Lucas, the FSB, the BII, All Party Parliamentary Beer Committee, CAMRA, Admiral Taverns and their predecessor Pyramid. Some as you may expect have been sympathetic, some such as BERR, BII and CAMRA, misinformed, unwilling to accept reason, or totally blinkered in their replies. None have oVered any true support, except my MP who is fighting on the Supermarket front. Our business is now up for sale, but who in their right minds would take on a “sinking ship” in an industry which is drowning itself. I may just walk away and hand the Landlord the keys. Conversely, we are seen by our customers and our village as the “Hub” of the community, central to many village celebrations and events. When we close for good, it will be diYcult to explain the factors behind our decision—other than that we’ve given it our body and soul, but our personal financial survival is more important than our Community obligations. 25 September 2008

Memorandum submitted by the Fair Pint Campaign

1. Introduction 1.1 The Fair Pint campaign welcomes the Business and Enterprise Committee’s inquiry into Pubcos; further to the original Trade and Industry Committee (T&ISC) inquiry in 2004. 1.2 Fair Pint believes that there has been no improvement in the financial and estate management relationship between Pubcos and their tenants since the T&ISC inquiry. In fact, the report’s objectives could be reissued today virtually without amendment. 1.3 The Fair Pint campaign is a coalition of supply-tied lessees and other industry professionals who have come together to ensure fairness for the many thousands of tied tenants who are struggling at the hands of their Pubcos. In particular, the campaign has looked to expose the complete lack of regard that Pubcos have paid to the 2004 T&ISC inquiry and to persuade the Government to take regulatory action to enforce its recommendations. 1.4 The Fair Pint campaign has received massive support and is well aware that the whole of the pub industry is currently experiencing diYcult times. Where pubs are genuinely non-viable as businesses it is natural that they will close, as is the case in any industry. However, Fair Pint exists to ensure fairness and that supply-tied tenants can compete with managed and free-of-tie pubs within the industry. We believe that survival in this diYcult marketplace should be based on the success of the business as opposed to the terms of the tenancy. 1.5 The key principle of the tied tenancy model is that tied tenants pay higher wholesale beer prices than other public house operators, but that this is oVset by countervailing benefits of a lower than commercial, or free-of-tie, dry rent (rent) and special commercial or financial advantages (SCORFA). The theory is that the net cost of the beer tie to tenants makes them no worse oV financially than if they were free-of-tie. This principle was fully acknowledged by the 2004 T&ISC inquiry [paragraph 133]. More importantly, it is a condition of exclusive purchasing agreements under EU competition law. 1.6 The Fair Pint campaign has serious concerns and doubts whether there is any evidence to support the view that tied tenants are no worse oV. Tied tenants are unable to compete with free-of-tie pubs, and many as a consequence are going out of business. The Fair Pint campaign would welcome any recommendations that would ensure that tied tenants are able to compete on a level playing field with managed and free-of- tie pubs. However, Fair Pint believes that the only way that this can be achieved is through the removal of the tie. It is clear that the major Pubcos have shown that they are unable to implement the T&ISC’s recommendations as best practice. 1.7 This submission presents the areas in which the Pubcos have failed to implement the recommendations of the T&ISC. Most importantly, it will show that the countervailing benefits of the tie are insuYcient to ensure that tied tenants are not financially worse oV than if they were free-of-tie.

2. To What Extent have Revisions to the Framework Codes of Practice met the Committee’s Concerns? 2.1 The 2004 T&ISC inquiry into Pubcos made a number of recommendations that were specifically targeted at achieving transparency and fairness for tied tenants of Pubcos. Fair Pint believes that none of these recommendations have been adequately met by the Pubcos or the British Beer and Pub Association (BBPA). Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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2.2 In November 2005, the BBPA revised their Codes of Practice Framework on the Granting and Operation of Tied Tenancies and Leases, with the aim of achieving “even greater consistency and transparency.” However, these changes do not reflect the key recommendations of the T&ISC report and have made no diVerence to the way that tied tenancies operate. 2.3 In order to get a snapshot of how Pubcos operate, the Fair Pint campaign undertook an online survey linked to the recommendations of the 2004 T&ISC to try to assess the levels of support for the beer tie amongst tied tenants.

AWP machine tie 2.4 The 2004 inquiry recommended that Pubcos remove the AWP machine tie [paragraph 129]. The BBPA code of practice has failed to endorse this recommendation, and Pubcos have openly ignored the Committee’s concerns. 70% of tied tenants that responded to our survey are still currently tied for AWP machines. 2.5 It is well-known that Pubcos usually take half of the money from AWP machines when they are emptied. However, this is not accounted for in the profit assessment calculation or as a deduction for the rental value of the pub. In addition, in order to become a nominated supplier by the Pubco, AWP suppliers have to pay a royalty payment to the Pubco. This payment is then passed on by the AWP supplier to the tenant in the form of higher rents for the machines than those for free-of-tie pubs. In this way, Pubcos are able to take three slices of money from their tenants’ AWP income.

Rent calculation 2.6 The 2004 inquiry also recommended that Upward Only Rent Reviews (UORRs) should be removed from leases as soon as possible [paragraph 151]. Whilst the revised BBPA code of practice has taken up this recommendation and states that there should be no UORR clauses in new leases, 29% of respondees to our survey stated that they still had UORR clauses in their lease agreement. 2.7 Unfortunately, where UORR clauses have been removed, it seems that in many cases a new clause has been included which sets a floor rent of the initial rental value. This practice has been set out in the revised BBPA code of practice, and goes against the T&ISC recommendation that the profit assessment method of calculating rent should be carried out in accordance with national accounting standards and with knowledge, prudence and diligence [paragraph 144]. If the profit assessment were to be implemented correctly, the divisible balance of 50%, which is recognised and accepted industry-wide, would be used to calculate the rent level. Applying a lease floor level removes the profit assessment basis of rent calculation. In a period of hardship for the pub trade, as we are experiencing currently, the individual licensees are bearing the weight of the burden when the profit assessment is not being applied correctly. The profit assessment needs to be implemented fairly and diligently so that both parties have an equal incentive to grow the pub business, meaning that it operates as a partnership for the benefit of both parties and not as it does at the moment. 2.8 The Pubcos have openly subverted the recommendations of the T&ISC through the introduction of annual increases in rent, linked with the Retail Price Index (RPI). The majority of respondents to our survey state that their rent is tied to RPI. However, as previously stated, profit is the established and accepted base for rent construction. Profits in any business do not vary with RPI; therefore RPI increases in rent are contrary to best practice and undermine the principles of transparency and fairness. Currently RPI increases on an annual and compounding basis would lead to rental levels that would increase by approximately 26% over five years on a “divisible balance” basis. That would indicate that the total profitability of the business would have to increase automatically by 52% over five years. We consider that to be neither credible nor achievable. 2.9 Recent Morgan Stanley research has found that of the 1,500 rent reviews that Punch has completed since 2006, under 100 have seen rents drop, and of the 900 renewals completed since 2006, only 40 have seen lower rents.37 The report also states that Punch and Enterprise are over-renting their pubs, and emphasised that Admiral Taverns had had to rebase the rents of a number of recently acquired pubs from Punch and Enterprise as it believed that they were over-rented in relation to their underlying profitability. 2.10 In a recent Morgan Stanley survey of 31 leased Enterprise and Punch pubs in London, 87% believed that their rent was around 20% too high. In addition, not one said that they would take on another tenancy.38 2.11 In our own Fair Pint survey, 91% of tenants felt that their Pubco charged them an unreasonable and unsustainable rent.

37 Morgan Stanley Research, Leased Pubcos: Avoid, 9 September 2008, p 7. 38 Morgan Stanley Research, Leased Pubcos: Avoid, 9 September 2008, p 6. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Transparency 2.12 The Pubcos have done nothing to promote transparency in their relationship with their tenants, through the provision of detailed profit assessments and information on how lease conditions are interpreted. This was a key recommendation of the 2004 T&ISC inquiry [paragraph 145]. 2.13 In fact, 94% of respondees to our survey stated that their Pubco does not provide them with a transparent and comprehensive breakdown of how they calculate their rent, and 97% stated that their Pubco does not provide them with a full detailed calculation of what the Pubco expects the tenant’s expenses to be in the rent valuation. 2.14 Similarly, T&ISC recommended that Pubcos advise their tenants of the average discount they receive, how this compares to the free market discounts available, and how much of this discount Pubcos are passing onto their tenants [paragraph 125]. However, 98% of respondees to our survey stated that their Pubco does not advise them on the average discount they receive from the brewer.

The supply tie 2.15 Pubcos, as a result of their size and the beer tie, are able to demand substantial discounts from the brewers. This is currently estimated at £200–220 per Brewers barrel (36 gallons). This is not dissimilar to the discount levels that supermarkets are able to demand. However, supermarkets pass on their savings to the consumer, while the Pubcos pass only a small fraction of that discount to their tenants. Therein lies the problem. In the open market a non-tied tenant can achieve in some areas, even for a relatively small barrelage, a discount of £100–£180 per Brewers barrel. That discount for a 200 barrel free-of-tie pub can be at least £20,000 per annum. However, a tied pub of a similar size, will not receive anything like the same sort of discounts (usually about 0–£40), and does not receive a countervailing reduction in rent. 2.16 Prices charged to the consumer are related directly to those charged by the supplier to the retailer. There has been a significant shift between the oV-sales and on-sales, the gap having widened exponentially over the last fifteen years from a 2.5 to one ratio to 4.5 to one ratio. It has always been recognised that pubs charge a higher price than charged as oV-sales, since the pub does supply shelter, ambience and service. However, there is no logical reason for the vastly diVerent rates of growth in retail on-trade and oV-trade price, other than as a result of the basic cost diVerential for the same or similar product. 2.17 The buying power of the Pubcos has also meant that the large brewery companies have had to cut their margins to the limit. Typically the discount to the Pubcos of £200–£220 per barrel leaves the brewer with a minimal return. Removing the tie would enable both the lessees and the brewers to work on a more profitable basis by excluding a “middle man” property company that neither brews nor sells beer. 2.18 “In many ways, the “tie” looks increasingly archaic. Arguably, it is exacerbating the volume declines in tied pubs, who are unable to reduce price without taking a significant hit to their cash margins. It is also not in the Pubcos’ interest to push back too hard on list price increases, because they get a proportion of the price increase as additional discount. Some even argue that Pubcos like it when brewers put up prices.”39 2.19 The rise in wholesale prices by the brewers tends to reflect the increased level of discounts demanded by Pubcos. In other words it would appear that the actions of the Pubcos increase the price to the pub consumer.

Free-of-tie vs tie 2.20 Pubcos make much of the training that they oVer, as a countervailing benefit of being tied. However, 84% of respondees to our survey said that they had never received free support to attend courses to improve their business knowledge and performance. 2.21 Similarly, Pubcos laud the help that their business development managers (BDMs) oVer their tenants. However, tenants do not reciprocate this feeling. In our survey, 52% of tenants indicated that they ‘hardly ever’ or ‘never’ see their BDM, whilst 84% felt that their BDM does not oVer them genuine assistance. 2.22 Of the supply tied tenants that responded to our survey, 100% believed that they would be better oV if they were free-of-tie. This was supported by figures from The Publican magazine’s 2008 Market Report which showed that 72% of tenants would pay more rent to be free-of-tie. 2.23 Morgan Stanley estimated that last year licensee profits were under £20,000 in 17% of Enterprise’s pubs and 28% of Punch’s. £20,000 is generally recognised as the minimum level to make running a pub worthwhile, and represents £3.30 an hour each for a couple (that is less than 60% of the National Minimum Wage). For this reason, more and more lessees are exiting the industry. Through the monitoring of the number of pubs available on Enterprise and Punch’s websites since the start of the year, it is possible to see

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that there is an increased level of “churn”, with pubs available for lease now accounting for 14–16% of their estates. Despite this, the same report states that there is evidence that pub companies have been taking an increasingly bigger share of the pie than their lessees.40 2.24 It is clear that the costs of the tie do not balance the “benefits”. Some critics argue that it is ultimately the tenants’ fault if they are having problems, as they freely entered into agreements with their Pubco, and if they didn’t like the conditions at the time, they should not have signed it in the first place. However, the Pubco/ tenant relationship is meant to be a partnership. The T&ISC inquiry recognised that in reality this was not true when it stated that the tenant is in the weaker bargaining position and that Pubcos should recognise that they have a responsibility to ensure they do not exploit their position of economic strength. Critically, the report also said that all tenants should be treated fairly, and rents should be reasonable and sustainable [paragraph 158].

3. To what extent are the Codes Applied by the Pubcos? 3.1 The Pubco Codes of Practice primarily adopt those of the BBPA, together with considerable rhetoric regarding their relationship with the tenant. None of the key recommendations ensure transparency or endorse fair and ethical practices in Pubcos’ relationship with their tenants. The most important principle “that the tied tenant should not be financially worse oV as a consequence of the tie” is not adopted or accepted by the Pubcos. This is proven on examination of their own profit assessment and rent computation. 3.2 “One-to-one” relationships at Pubcos’ base level are regularly adversarial with the lessee, to the detriment of industry-wide good estate management.

4. Is there a need for further Regulation of the Industry? 4.1 The Pubcos, and the BBPA, have not adopted the T&ISC recommendations. It is self-evident that ignoring these recommendations denies the tied tenant the right to not be in a worse financial position than if they were free-of-tie. Therefore further regulation is necessary to ensure that the recommendations of the 2004 T&ISC inquiry are implemented. 4.2 Historically brewers required a supply tie for pubs that they owned in order to support their volumes of production, which was primarily a short-lived product—real ales. The change in product base to one which has a much longer shelf-life, coupled with improvements in distribution, has removed that supply tie necessity. 4.3 None of the examinations over the last two decades by the Monopolies and Mergers Commission, the OYce of Fair Trading or the T&ISC have achieved the objective of ensuring that the tied tenant is not worse oV financially than if they were free-of-tie, as is required under EU competition law. Even if legislation were to be passed to make sure that the rent computations were appropriately adjusted, Pubcos would use legal loopholes to extract those extra few thousand pounds per pub they need to shore up their debt and asset values. Removal of the supply tie is the only satisfactory remedy for tenants. 4.4 There is no economic reason why wholesaling and property functions should not be separate. If the Pubco model had adopted the T&ISC recommendations it would have meant that the tied tenants would have been given the benefit of the full, open market wholesale discount, and the Pubcos as wholesalers could have maintained a wholesale trade and enjoyed the diVerence between the £220 discount that they are able to demand from the brewers and the £140 market discount. 4.5 Unfortunately the Pubcos’ business model ensures that the tied tenant is worse oV financially. The T&ISC industry-wide inquiry found that unacceptable in 2004 and it is even more unacceptable in 2008. 4.6 Fair Pint therefore believes that the Government must introduce legislation to remove all vestiges of Pubco control over their tenants relative to: — all AWP machine suppliers and income; — all Upward Only Rent Review clauses, including reference to annual increases in relation to any form of index; — supply tie of anything at all (food, all forms of liquor or operating cost), excluding brewers with less than 500 pubs; and — involvement in any rating assessment. 4.7 Statutory guidance must also be introduced to ensure enforcement around the Trade and Industry Committee’s recommendations on transparency in the rent review process [paragraphs 144 and 145]. 4.8 Many people have argued that the removal of the supply tie would mean that the Pubcos would simply replace the income lost from the beer tie with an equivalent increase in rent. However, this argument fails to grasp that the enforcement of the T&ISC’s recommendations would not allow this to happen. The

40 Morgan Stanley Research, Leased Pubcos: Avoid, 9 September 2008, p 5. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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profit assessment of the rental value would have to be calculated transparently and accurately to the satisfaction of both parties. A divisible balance of 50%, which is recognised and accepted industry-wide, would then be used to calculate the rent level. 4.9 Even where a pub’s current rent has been correctly valued, the maximum the rent could increase by in a free-of-tie situation would be half the cost of the tie, with the other half going to the lessee as additional profit. It is undeniable that the Pubcos would lose out in a free-of-tie situation, but then they have been bleeding their tenants dry for years and will ultimately destroy the industry that we all love, for short-term gain. So many tenants have spent their life savings improving Pubcos’ assets, only to forfeit their pub because their tenancy agreement is non-viable as a result of the Pubcos’ unreasonable assessments and terms. The Fair Pint campaign would be very willing to provide further information on any points that require further clarification, and would be delighted to give oral evidence to the Committee. September 2008

Supplementary submission by the Fair Pint Campaign Further to the Fair Pint campaign’s oral evidence session at the Business and Enterprise Committee’s Inquiry, the campaign would like to submit the following evidence. The Committee requested various statistics on the number of licensees that have gone out of business and the breakdown between urban and rural pubs. Unfortunately, the only people that hold this information are the pubcos themselves and it is impossible to access.

1. Codes of Conduct and Mediation

1.1 The Committee asked the Fair Pint campaign whether the BBPA or BII would be appropriate bodies to monitor pubco codes of conduct and act as mediators. The BII, by its own admission, is not able to help licensees if they have a problem with their pubco. Their website states that the “BII is not a trade body or union, and therefore we do not represent licensees against their employer.” Similarly, it also states that they “do not advise licensees on rent reviews.” 1.2 Quite apart from the fact that they openly state they are unable to help licensees, the BII also displays a lack of understanding of the relationship between pubcos and their tenants, in referring to the pubcos as ‘employers’ of their tenants. If this were the case, pubcos would be restricted by employment law and would have to ensure that their tenants earned at least the minimum wage. This is simply not the case, as evidenced by Morgan Stanley research, which estimates that last year licensee profits were under £20,000 in 17% of Enterprise’s pubs and 28% of Punch’s. In 2001, £20,000 was recognised as the minimum level to make running a pub worthwhile. This represents £3.30 an hour each for a couple (ie less than 60% of the National Minimum Wage). 1.3 In addition, it should be noted that the major pubcos are all corporate members of the BII. However, more importantly, the BII receive a kick back from the pubcos for every licensee that is given BII training. 1.4 The BBPA claims that it “is the leading organisation representing the UK beer and pub sector. Our members account for 98% of beer brewed in the UK and own more than half of Britain’s 58,000 pubs.” In reality it is merely the trade association for pubcos and brewers. In fact, Simon Townsend, Chief Operating OYcer for Enterprise Inns, is currently the Chairman of the Communications Group of the BBPA. The BBPA represents the interests of those that own the vast majority of the pubs in the country, but actually run very few. None of the BBPA’s members are individual tenants. 1.5 Since neither the BBPA, BII nor RICS have been prepared to endorse the Trade and Industry Select Committee (TISC) recommendations, it makes them entirely unsuitable to act as mediators between the pubcos and lessees.

2. Machine Income

2.1 The Trade and Industry Committee recommended the removal of the restriction imposed by pubcos relating to AWP machines. It has been estimated that this costs the tenant an average of at least £1,250 per machine per annum. For an estate of just one pubco with 7,500 pubs, with the assumption that they have just one machine per pub, the pubco is eVectively taking £9.4 million of money that the Committee believed rightfully belongs to the tenant. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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3. Rent Reviews

3.1 Impact of the wet rent Figures issued by Enterprise reveal that the average tied tenant is worse oV financially than a free-of-tie tenant by at least £6,000 per annum. There is no reason to believe that the same does not apply to Punch Taverns. The total loss of income for the 15,000 tenants of Punch and Enterprise may be in the region of £90 million, in addition to the £9.4 million relating to AWP machines.

3.2 Impact of current market conditions According to the press in the last 12 months, turnover has fallen across the board by an average of 10% per annum, and costs, including labour and the impact of the new National Minimum Wage, have risen by between 7% and 10%, creating a 50% drop in profit attributable to the tenant. Enterprise have indicated that in the last twelve months there were 915 rent reviews, which resulted in an increase in rent averaging 2.2%, in addition to the annual RPI increases. So rent has increased, meaning that Enterprise’s projected profit has increased by 2.2%, which does not reconcile with what is generally happening in the market place.

3.3 Impact of annual RPI increases The pubcos that have maintained and enforced annual increases in rent on an RPI basis have cost tenants a 16.1% increase in rent over the last four years, giving an average increase of £4,500 or the equivalent of £1,125 per annum per pub. For an estate of 7,500 pubs that is an increase of £8.4 million per annum or £33 million extracted by each of the two major pubcos over the four years. Given that trading profit has dropped, rent should have reduced and not increased.

3.4 Impact of ignoring transparency recommendations Transparency, including the adoption of national accounting principles, fairness, prudence, and diligence, have already been recommended but never adopted by pubcos, valuers, arbitrators or RICS. In addition, it was recommended that an addendum setting out how profit and rent has been assessed and that this information should also be included in a National Register. Pubcos, valuers and arbitrators have resisted this. A National Register is essential to ensure transparency and fairness in rent valuation. The Land Registry seems the obvious choice, as it is centrally owned and devoid of personal interest.

4. Beer Supply 4.1 The impact of how the supply tie operates against the interest of both the consumer and the tenant is highlighted by the recent decision by Enterprise Inns to remove Carlsberg from their list of supplies. Whilst they have since gone back on this decision, it shows the power that pubcos are able to hold over both the tenants and the brewers. The decision to remove the Carlsberg brand from their pubs would have had a substantial impact on the revenue and profitability of many pubs (approximately 20% sell Carlsberg), particularly those in which Carlsberg is the biggest seller. Enterprise’s decision would have led to many customers going elsewhere in order to buy Carlsberg, but their rent would of course not have been reduced to reflect this circumstance. 4.2 For a pub that changes its brands, without consideration for its customers, a drop of volume can follow, making a substantial impact on profitability of as much as 25%. The Enterprise action would have been anti-competitive and onerous on tenants. This is a classic example which supports the request for removal of the supply tie.

5. Transparency 5.1 In a recent statement published in The Sun, Ted Tuppen CEO of Enterprise Inns said: “The British pub is so much a part of the fabric of this country, and it’s vital that steps are taken to protect it.” Fair Pint is of that same opinion. The problem is that the British pub is at risk because of the existence of the supply ties and the failure to have transparency in the creation of rent and Enterprise Inns’ misuse of the supply tie and avoidance of transparency. 5.2 Mr Tuppen went on to say: “We are purveyors of a legal contract. We believe we are entirely transparent and we will support those who are genuinely in need of it.” One of the underlying principles of a contract is that it should not be anti-competitive and that is the reason why the tied tenant should not be worse oV financially than if they were free of tie. Given that RICS, the BBPA and the pubcos do not support that criteria, and do not supply profit assessments that satisfy national accounting standards, it cannot be possible to prove that the tied tenant is not worse oV than if they were free of tie. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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5.3 Enterprise Inns have also stated that 75% of their pubs have increased earnings for their tenants during a period when sales have fallen and costs increased. The Fair Pint campaign would be very interested to see evidence for this scenario which can only be achieved by comparing profit and loss accounts for the last three years, assembled by the company auditors using actual profit and loss accounts from tenants. It is known that Enterprise tenants are required to submit accounts to them, so it should not prove a diYcult exercise to undertake. From that information it would allow the Committee to test the pubco claim that the tied tenant is not worse oV than if they were free-of-tie.

6. Impact of Supply Tie Removal 6.1 Pubcos will always argue that their rental cost is fair and that they believe that they are entirely transparent. The problem is that the pubcos cannot ensure that the tied tenant is not worse oV than if they were free of tie, because the cost to the pubco would deny them the ability to service their vast debt. Whilst they claim fairness and transparency, they have never provided factual evidence to support this stance. The recent case of Dodds v S&NPE highlights the issue. There were £10,600 of discounts not accounted for and, as the Appeal Court Judge stated, the omission was a serious irregularity which would cause substantial injustice to the tenant. 6.2 Although pubcos may argue that jobs may be lost in their head oYce and that shareholders and lenders interest may be damaged if the tie is removed, it has to be reiterated that had the pubcos gone down the path of adopting the Trade and Industry Select Committee’s (TISC) recommendations four years ago the problems being experienced today would have been smaller. The failure to adopt the TISC recommendations should be firmly laid at the Directors of those companies. 6.3 By contrast, removal of the tie will ensure the survival of many jobs and pubs that are currently under serious threat. The appendix, prepared in February 2008, shows an estimation of the breakdown of costs and profit margins for the tied model compared with the free-of-tie model. In addition, customers will have more choice, as licensees will be able to oVer products that their pubco does not list (note the Carlsberg situation above). In the Fair Pint survey, 77% of respondents stated that there are products that they would like to oVer but are unable to as a result of the tie.

7. Valuation of Pubcos’Estates 7.1 Evidence indicates that the Pubco asset valuations are not based on the retail pub profitability but is increased by a proportion of other income streams not available in the open market.41 The inclusion of other income streams has the eVect of inflating property values by 40%. 7.2 Enterprise Inns has stated that its estate has increased in value by 1% to an average of £755,000 over the past year. On that basis they say their estate of 7,763 pubs is worth £5.9 billion. Similarly, Punch Taverns have valued their estate at £6.4 billion, which is a marginal decrease of 3.6%. Punch claim their pubs are worth £758,000 each, strangely similar to Enterprise, but then they do have the same auditors. 7.3 It is very hard to reconcile these figures with the recent pub valuations from Fleurets.42 Fleurets’ figures suggest that the average price for a freehold pub has fallen by 20% from 2007 to 2008. If we were to apply Fleurets’ average decline in value, it would suggest that Enterprise’s estate would be worth £4.16 billion, against a debt of £3.8 billion, and that Punch’s estate is worth £5.17 billion, against a debt of £4.53billion. 7.4 This really gets to the root of the issue. Before the Beer Orders, the brewers ultimately had the best interests of pubs at heart. That, however, cannot be said for the pubcos. The simple fact is that under the current industry downturn, pubcos are unable to be flexible in their rental levels, as to do so would almost certainly break their banking covenants.

41 Punch Securitisation Document, Page 124, “Punch Securitisation ptf oct03.pdf” 42 Fleurets, Market Intelligence: Survey of Prices, December 2008. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 226 Business and Enterprise Committee: Evidence

APPENDIX

Comparison of Tied and Free-of-tie Pubs Prepared February 2008

Pence per pint split - at £3 per pint - in a (pubco) leased and tied pub

Pubco’s cost Brewer’s costs 7p / 2.33% 24.8p / 8.27% Brewer’s profit Tenant’s costs 1.9p / 0.6% 76.6 / 25.53%

Government 77.3p / 25.77%

Tenant’s profit 24.4p / 8% Pubco’s 88.1p / 29.37%

Pence per pint split - at £3 per pint - in a (freehouse) free of tie

Brewer’s costs Brewer’s profit Tenant’s costs 24.8p / 8.27% 76.6p / 25.53% 9p / 3% Wholesaler 20.2p / 6.73%

Freeholder 46p / 15.33% (could be licensee’s freehold) Goverment Tenant’s profit 77.3p / 25.77% 46.1 / 15.37%

December 2008

Supplementary evidence submitted by the Fair Pint Campaign The following supplementary evidence from the Fair Pint campaign highlights a series of quotes from the Committee’s oral evidence session held on 9 December 2008, and provides evidence to the contrary on a number of specific issues. 1. In answer to Question 161, on the reason why turnover is higher in managed pubs, Rob Hayward said: “It is also because there is a regulatory burden associated with employment in the line which makes it uneconomic to have managed houses at a smaller level. The point at which you operate a managed house has risen ever higher in the last two decades.” This suggests that pubs with a lower turnover do not have exactly the same regulatory burdens, which of course they do. There are no regulatory burdens for managed houses that do not apply to all pubs. However, the tied tenancy model means that pubcos can simply pass on the regulatory burden to the tenant/lessee. 2. In answer to Question 212, Ted Tuppen said: “There is just one point, I think, for clarification that I would like to draw your attention to, and I am sure you have read it, but the 2004 TISC inquiry did conclude that “the tie usually balances the costs and benefits available to tenants” and that “the existence of the tie provides demonstrable benefits to both tenants and customers alike”. Now, the TISC in 2004 did not conclude that the tied tenant should be financially no worse oV than the free-of-tie tenant. That was never a conclusion. It is a point being peddled frequently by the Fair Pint Campaign, but it ignores entirely all of the other benefits which Giles just referred to that we give to our tenants.” Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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The TISC stated that “Under EU competition law, contracts containing an exclusive purchasing obligation, such as the beer tie, have only ever been permitted if they provide such “countervailing benefits”. The theory is that the net cost of the beer tie to the tenants makes them no worse oV than if they were free of tie [paragraph 133]. The TISC also said that the “‘value equation’ suggests the countervailing benefits tenants receive should leave them in the same position as if they were not tied at all” [paragraph 178]. However, they went on to say that they did not have suYcient data to confirm that point. Therefore, the TISC made recommendations to ensure that there is transparency in the rent assessment process, through whole detail of countervailing benefits and how they are accounted for in the profit assessment [paragraphs 144 and 145]. Unfortunately, the pubcos have failed to abide by these recommendations. 3. In answer to Question 218, Simon Townsend said: “I would also wish to make one point, that there is a sort of urban myth that has been propounded by various parties that the temporary support provided by companies in some way is repayable, and can I make it very clear that, as far as Enterprise is concerned, no amount of the business support that we provide in additional discounts or rental concessions is repayable; that is simply not the case. This is permanent financial assistance over a temporary period of time designed to prevent the business failing.” Appendix 1 has two examples of where Enterprise are oVering their pubs some financial assistance, but changes the detail of their arrangement. In the first pub was originally tied for beer only and then in 2006, by Deed of Variation, cider was included in the tie. Enterprise are now demanding a full tie, plus strict control and confidentiality, as a condition for the financial assistance. 4. In answer to Question 255, Simon Townsend said: “If I can make one final point on this idea of business failure, and Mr Hoyle was about to raise it earlier I think, it has been suggested to this inquiry that we have no fear of a business failure or a closed pub because of some insurance policy that covers us for two years’ loss of rent. That is a complete fabrication and really we need to put the sword to that idea. There is no insurance policy that can cover Enterprise Inns for the loss of rent or the loss of income in a pub that has been closed down through a business failure or abandoned; that is a total fabrication. It is an absolute cost to us and we will do everything we can to prevent that business failure.” Please see Appendix 2 (not printed here), which is an extract from the lease of the Eagle Ale House, Battersea (Enterprise). In Clause 6.1, the lease states: “The Landlord covenants with the Tenant at all times during the Term to keep the Premises (except the glass thereof) insured (unless the insurance is prejudiced by reason of any act omission or default on the part of the Tenant) against loss or damage by fire and such other risks as the Landlord shall from time to time think fit and shall insure loss of three year’s open market rent of the Premises and expert’s fees.” 5. On Question 261, in relation to Brulines, Giles Thorley said: “The simple answer, as hopefully most of us will be aware, is that beer is a diVerent density from water, so it actually measures the diVerence in the density of the products, so, therefore, as you are well aware, when you are cleaning a line, that is already factored into the volume that goes through the flow meter. I am happy to provide a more technical analysis of that.” This is simply not the case. Brulines does not measure density; it only measures flow and is therefore unable to diVerentiate between beer and water. 6. In answer to Question 270, Simon Townsend said: “We do not have access to the pub’s books in the circumstances of either a new let or indeed an assignment. As has wrongly been suggested to this inquiry on an earlier occasion, we do not have access to the tenant’s books.” Please see Appendix 3 (not printed here), which is an extract from a sample Enterprise Retail Partnership Agreement from 2006. This states that “Within three months of the expiry of your trading or accounting year you must supply us with a copy of your trading accounts (including reasonable evidence of turnover) for the Business for the year in question and notify us of any changes in the dates of your accounting year. You must provide us with a copy of each quarterly VAT return for the Business within one month of the date of submission required by H M Revenue & Customs.” 7. In Question 290, on the benefits of the tie, Ted Tuppen said: “What we can do, and I would be very happy to put this in a letter to you afterwards, are, for example, special buy-in deals where our licensees, because they are Enterprise licensees, at no kick-back whatsoever to us get things more cheaply than they could otherwise get them, so there are real benefits there. There are a whole series of things, and I would draw your attention again to the 2004 TISC conclusion which says, “The tie usually balances the costs and benefits available to tenants and the existence of the tie provides demonstrable benefits to both tenants and customers alike”. As was previously stated, the TISC also stated that “we did not receive suYcient data for any one pubco or pubcos in aggregate to judge with any degree of accuracy whether the wholesale price diVerential on tied products plus AWP income were exactly counterbalanced by the countervailing benefits of a rent subsidy and other special commercial or financial advantages” [paragraph 179]. The fact is that the costs and benefits are actually included within the profit and loss account and so if the profit does increase then the rent will also increase. Therefore, not only will the tenant benefit, but so will the pubco. That is why detail on the profit assessment is so important [paragraphs 144 and 145]. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 228 Business and Enterprise Committee: Evidence

APPENDIX I Dear I refer to our recent discussion about your business. I am pleased to be able to confirm our agreement to a series of short-term support activities for your business, and a longer term plan. The terms for the short term assistance are set out in a side-letter annexed to this letter, on strict condition that this long term plan is agreed forthwith. The concessions will then be available to you during the Concessionary Period running from ********** to the Expiry Date **********. It is not agreed between us that our mutual overall objective is to work together to try to grow and develop your business in order to secure a continuing viable long-term business relationship on the present lease or tenancy terms. As you are aware we will arrange regular business reviews with you during this interim period. As a result of those reviews the Company may, entirely at its option and discretion, defer the Expiry Date or reconsider with you the object of the long term plan. The terms of this agreement are confidential, and you undertake not to disclose its terms to anyone without our written consent; excepting only that you will be able to disclose these terms to your accountants, stock-takers and bankers for the purpose of putting the terms of this agreement into full aVect. Yours faithfully Enterprise Inns plc

Divisional Director I confirm that I am in agreement with all of the above terms

Signed Dated

Signed Dated This letter in ancillary to the Business Recovery letter of the same date. We expect you to comply in full with the terms set out below, and to countersign this letter to record your agreement. If you do so, Enterprise Inns plc (“the Company”), as agent for the relevant legal owner, will enter into the following concessions from **********. These concessions are personal to you, they do not constitute a variation of your lease or product suppply terms, and will all cease in the event that you do not fully comply with your commitments set out in both this letter and the Business Recovery letter. From ********** until ********** (the “Expiry Date”) or upon earlier termination due to your default: 1. You will receive a discount of £100 per 36 gallon barrel on draught beers and ciders brought from the Company for resale at the premises on the terms set out in the attached Enterprise Inns Price List and discount table, which will be paid oV invoice. For the duration of this agreement it replaces the price list specified in your tenancy or lease, if diVerent. 2. You will be tied to buy all your beers and ciders (however packaged), FABs, wines, spirits and minerals for resale at the premises from the Company and the prices you will pay are set out in the attached price list (not printed here). 3. The Company reserves the right to vary these price lists at any time. 4. All goods must be paid for by variable direct debit, or such other means as the Company may specify from time to time. 5. The Company will install beer and cider flow metering equipment if it is not already installed and any variances of products dispensed over delivered will lead to this agreement being cancelled without notice and with immediate eVect. 6. The Company requires you to notify your accountant and stock-taker forthwith that the Company will liaise directly with them to access your monthly trading figures, VAT returns and stocktaking results, and in the event that you do not have a retained accountant and/ or stock-taker the Company will appoint the same at your cost. 7. We will co-operate together in an initial and ongoing review of the business; including agreeing: a. Retail pricing of drinks and food to ensure the customer proposition is market competitive. b. Number, poisitioning and promoting of gaming and other machines. c. Opening times and staYng. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 229

d. The Company will conduct a retail standards audit and agree actions with you to resolve any issued arising from it. e. Access to brand-owners’ support. f. The long term sustainable Profit & Loss model in the hands of a Reasonably Competent Operator. g. The need for any repair and decorations, and the appropriate way to remedy them. 8. From ********** to ********** the rent set out in the Lease dated ********** will be reduced by ********** excluding VAT, per annum to ********** excluding VAT, per annum (“the Reduced Rent”) to be paid monthly in advance by direct debit. 9. In the event of you defaulting in: a. Making payment of the Reduced Rent on the due dates. b. Making payment of all other sums due and owing on the terms of this personal agreement. c. Complying with all the other terms of this personal agreement and those terms of the Lease that remain un-amended by it. d. Undertaking reasonable co-operation with the business review process. e. Complying with the confidentiality clause below. 10. Any extension of the personal agreement must be documented by way of a new, signed Business Recovery Letter and a new, signed Personal Concessions Agreement. 11. The terms of this agreement are confidential, and you undertake not to disclose its terms to anyone without our written consent; excepting only that you will be able to disclose these terms to your accountants, stock-takers and bankers for the purpose of putting the terms of this agreement into full eVect. 12. In the event that this personal concession agreement is not complied with in any respect we reserve the right to commence proceedings to recover possession of the premises. Yours faithfully Enterprise Inns plc

Divisional Director I confirm that I am in agreement with all of the above terms

Signed Dated

Signed Dated

1 Business Recovery Lease Merge v3 Our ref: 900437/31215 Dear Mr and Mrs P******

Personal Concession Agreement This letter in ancillary to the Business Recovery letter of the same date. We expect you to comply in full with the terms set out below, and to countersign this letter to record your agreement. If you do so, Enterprise Inns plc (“the Company”), as agent for the relevant legal owner, will enter into the following concessions from **********. These concessions are personal to you, they do not constitute a variation of your lease or product suppply terms, and will all cease in the event that you do not fully comply with your commitments set out in both this letter and the Business Recovery letter. From ********** until ********** (the “Expiry Date”) or upon earlier termination due to your default: 1. You will receive a discount of £70 per 36 gallon barrel on draught beers and ciders brought from the Company for resale at the premises on the terms set out in the attached Enterprise Inns Price List and discount table, which will be paid oV invoice. For the duration of this agreement it replaces the price list specified in your tenancy or lease, if diVerent. 2. You will be tied to buy all your beers and ciders (however packaged), FABs, wines, spirits and minerals for resale at the premises from the Company and the prices you will pay are set out in the attached price list. 3. The Company reserves the right to vary these price lists at any time. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 230 Business and Enterprise Committee: Evidence

4. All goods must be paid for by variable direct debit, or such other means as the Company may specify from time to time. 5. The Company will install beer and cider flow metering equipment if it is not already installed and any variances of products dispensed over delivered will lead to this agreement being cancelled without notice and with immediate eVect. 6. The Company requires you to notify your accountant and stock-taker forthwith that the Company will liaise directly with them to access your monthly trading figures, VAT returns and stocktaking results, and in the event that you do not have a retained accountant and/ or stock-taker the Company will appoint the same at your cost. 7. We will co-operate together in an initial and ongoing review of the business; including agreeing: a. Retail pricing of drinks and food to ensure the customer proposition is market competitive. b. Number, poisitioning and promoting of gaming and other machines. c. Opening times and staYng. d. The Company will conduct a retail standards audit and agree actions with you to resolve any issued arising from it. e. Access to brand-owners’ support. f. The long term sustainable Profit & Loss model in the hands of a Reasonably Competent Operator. g. The need for any repair and decorations, and the appropriate way to remedy them. 8. From ********** to ********** the rent set out in the Lease dated ********** will be reduced by ********** excluding VAT, per annum to ********** excluding VAT, per annum (“the Reduced Rent”) to be paid monthly in advance by direct debit. 9. In the event of you defaulting in: a. Making payment of the Reduced Rent on the due dates. b. Making payment of all other sums due and owing on the terms of this personal agreement. c. Complying with all the other terms of this personal agreement and those terms of the Lease that remain un-amended by it. d. Undertaking reasonable co-operation with the business review process. e. Complying with the confidentiality clause below. 10. Any extension of the personal agreement must be documented by way of a new, signed Business Recovery Letter and a new, signed Personal Concessions Agreement. 11. The terms of this agreement are confidential, and you undertake not to disclose its terms to anyone without our written consent; excepting only that you will be able to disclose these terms to your accountants, stock-takers and bankers for the purpose of putting the terms of this agreement into full eVect. 12. In the event that this personal concession agreement is not complied with in any respect we reserve the right to commence proceedings to recover possession of the premises. Yours faithfully Enterprise Inns plc

Divisional Director I confirm that I am in agreement with all of the above terms

Signed Dated

Signed Dated Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 231

Supplementary evidence submitted by the Fair Pint Campaign

1. The Fair Pint Campaign is calling for a complete end of the tie without exception.

2. In our oral evidence, the Fair Pint Campaign called for an end to the tie, with the exception of local breweries who owned fewer than 500 pubs. We proposed this exception so that small brewers who own pubs and have an interest in promoting their products through the pubs they own would not be caught by any legislative change.

3. Since the oral evidence session, Fair Pint believes the harm that the tie is causing the pub trade is more established. There is emerging evidence to show that tied pubs in general, and not just those owned by the largest pubcos, are suVering more than managed estates or free houses.

4. We believe that the tie causes market distortions which are not in the interests of consumers, tenants, brewers or the industry in general. We are concerned that such market distortions which could occur—if exceptions for estates of fewer than 500 pubs were allowed—would outweigh any possible benefits.

5. Allowing an exception of estates of fewer than 500 pubs could create a loophole which might enable the current system to continue. The securitization structure of the both Punch and Enterprise divides the companies’ estates into groups of about 2,000 pubs. Recent restructuring by Punch has created a division of 1,000 pubs split into two regions. We believe that if an exception were made for estates of fewer than 500 pubs, the pubcos would be split down into smaller groups. If they were to establish a joint venture with a brewery they could operate their businesses in exactly the same way as the currently do and tied pubs would continue to face the same problems as today.

6. The current dominance of the pubcos in the beer wholesale market creates significant barriers to entry for smaller brewers. Brewers can only supply their products to pubco tenants if they are on the pubco lists. Pubcos require that brewers oVer them substantial discounts meaning that some small producers end up making a loss on supplying pubco tenants. A substantial number of products from small and regional brewers are excluded from the pubco lists or priced at an uncompetitive level. In many cases smaller brewers are almost completely excluded from their own local markets.

7. We believe that a truly open and competitive market will provide plenty of scope for regional brewers to promote and distribute their products resulting in greatly enhanced choice for the publican and the consumer.

ASustainable Number of Pubs?

8. The Fair Pint Campaign disagrees with claims that the current number of pubs in the UK is unsustainable. Social changes in specific areas will lead to changes in demand from consumers in relation to their drinking habits. Many pubs and publicans are able to adapt to those changing circumstances as can be seen by the resilience of those pubs in the free of tie sector. Through excessive pricing through the tie and through aggressive manipulation of the rent review system pubcos and brewers have reduced tenants’ operating margins to unsustainably low levels. Net margins for free of tie publicans can be as high as 20% and as low as 2% for tied pubs. This prevents investment, bank lending and adaptation in the tied sector and the severity of the current downturn is exposing the vulnerability of tied pubs. Removal of the tie will enable tied publicans to purchase beer at up to 50% less than they are forced to pay in the tie, coupled with a thorough correction of the rent review system, this will enable many more pubs and jobs to be preserved.

9. Recent trading results from the sector show that free from tie operators such as Wetherspoons and M&B have been able to respond to changing market conditions and have actually managed to achieve increases in trade and market share. In comparison tied estates have done much worse.

A trading update from Enterprise Inns which was published at on 22 January this year stated that trading over Christmas and the New Year had been diYcult with average pub profit falling by 8%. Punch had unveiled even worse results for its leased and tied estate on 13 January stating that like-for-like profit fell 12% in the 20 weeks to 10 January.

The trading update showed that performance in the group’s managed estate had been stronger with declines of just 2.5% in the 20 week period until 10 January and sales over Christmas and the New Year increasing by 1.9%.

Greene King similarly reported on the 28 January that its leased and tenanted division fell by 8.5%, in comparison its managed estate has seen a 2.4% increase in like-for-like sales. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Free of tie operators such as Mitchells & Butler and JD Wetherspoon have been reporting strong growth. On 20 January JD Wetherspoon stated that like for like sales had risen 2.6% in the quarter to 18 January and had climbed 6.4% since the group had launched price promotions. Mitchells & Butler reported its “strongest ever record of market share gain” with sales of cask ales rising by 18%. The group stated that it was able to charge 40p a pint less for a standard lager than the average price in leased pubs. The Chief Executive Tim Clarke stated that the trade had reached a “tipping point” in the value gap between managed and tied tenanted operators. 10. Our research has shown that pubcos typically buy their beer at a discount of £250 per 36 gallon barrel, equating to a price of as little as £100/barrel. They sell it on to their tenants at the list price of £350–450 per barrel depending on product. Pubcos do oVer discounts to some tenants but these are typically only £40–45 per barrel, and these are limited to the minority of tenants who sell large volumes. Free of tie multiple operators are able to negotiate their own discounts of £180–220 per barrel. Individual free tenants are able to negotiate up to £170 discount per barrel meaning that, for a £350 barrel, an individual, free of tie tenant could be £170 per barrel or 60p a pint better oV than a tied tenant. Similar discounts are available on smaller kegs and bottled beer. The table below shows the cost at which Enterprise Inns pays the brewer, Coors, to supply one if its tied tenants with an 11 gallon keg of Carling the price that Enterprise will then charge its tenant for that keg and the price which any free of tie pub would have paid if it ordered the same keg directly from the brewer. We have also produced an analysis of the diVerence in cost of beer from one supplier, Scottish & Newcastle, to their tied tenants and the cost that they are able to supply the same products to untied tenants. The final table shows how Enterprise Inns have increased the cost of their products to their tied publicans at twice the rate of inflation and how the rate if their increases compares with the much lower rate of increase of duty.

Table 1:

Comparison of Costs from Enterprise Inns compared to costs directly from a brewer

Costs of a 11 Gallon Keg of Carling

Price available to Price at which Price that an untied tenant Enterprise Inns sell Enterprise Inns direct from Coors to tied tenants pays Coors 11 gallon keg £63.11 £128.00 £45.00 Price per pint £0.72 £1.45 £0.51 DiVerence per pint between tied and untied £0.74 Duty £0.36 £0.36 £0.36 Gross profit per-pint to supplier £0.36 £1.09 £0.15 Gross profit if a pint is sold at £2.50 £1.46 £0.72

Table 2:

The price diVerence between leading beer and larger brands supplied by Scottish & Newcastle Pub Enterprises (which manages tied pubs on behalf of RBS) to its tied tenants and the price that Scottish & Newcastle as a wholesaler sells the same product to untied pubs

Price from Scottish & Newcastle Pub Enterprises Price from Scottish & Brand to their tied tenants Newcastle to untied pubs DiVerence

Fosters £117.01 £74.10 57% Amstel £128.27 £83.85 52% Kronenbourg £134.27 £92.55 45% Heineken £139.74 £97.81 43% Theakston Best £104.37 £59.62 75% Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Table 3 Increase in prices which Enterprise Inns charges to its tied tenants for key popular brands between 2002 and 2009

Brand 2002 price/pint 2009 price/pint % increase Heineken £1.09 £1.67 53% £1.15 (5.1% ABV) £1.55 (5.0% ABV 34% Hoegarden £1.30 (5.0% ABV) £1.82 (4.8% ABV) 40% Boddingtons Draughtflow £0.88 (3.8% ABV) £1.35 (3.5% ABV) 53% Banks Bitter £0.88 £1.22 38% Greene King IPA £0.86 £1.25 45% The increases shown are made worse when you consider that in many cases the ABV is reduced thereby reducing the duty paid. The average rate of inflation per annum across the same period, excluding mortgage interest, was 2.84%, giving a compound rate for the period from 2002–09 of 21%. Price increases in the sample of brands shown demonstrate and average increase of 43.8%; constantly twice the rate of inflation. Duty on a pint of beer has increased by 7p from 29p to 36p (24%) in the same period. 11. Tied pubs are finding it diYcult to compete, because despite current economic problems, pubcos are continuing to raise beer prices and rents to their tenants in order to fund their debt obligations. For Example Enterprise Inns raised its prices by twice the rate of inflation in the first few weeks of this year. It is this continuing pressure of tenants’ bottom line caused by increasing prices and increasing rents which is the main cause of the problems currently being faced by the pub sector. 12. The BBPA and the “pubcos” are arguing that the suspension of duties on beer or a reduction of the current level of duty is would help pubs to survive in the current economic climate. We would argue that levels of duty are a less significant cause of the problems faced by tied tenants than the increasing price at which tied tenants are forced to buy beer from the “pubcos”. The fact that “pubcos” are have been continuing to raise prices despite the problems being faced by the sector, we are concerned that any reductions in the rate of duty will be absorbed by the brewers and “pubcos” and would not be passed on to tenants or consumers.

The 2004 Trade and Industry Select Committee Report’s Recommendations 13. The only basis on which a tied arrangement can be viewed as fair is if the benefits of the tie outweigh the costs. Those benefits have to be capable of expression as a monetary value. This prime principle, that the tied tenant should not be worse oV than if free of tie, has been upheld by the European Court of Justice and the Appeal Court and was supported by the Trade and Industry Select Committee in 2004. 14. In order to improve the fairness of tied arrangements the Trade and Industry Select Committee’s recommended the removal of the AWP tie, new national guidance for rent calculations and changes to the way profit assessment method for calculating rent was carried out ensuring that they are carried out in accordance with national accounting standards and with knowledge, prudence and due diligence. The report also called for tenants to be given a breakdown of how rents are calculated which would include the whole detail of the profit assessment and how lease conditions had been interpreted by valuers. It recommended that this information ought to form an addendum to leases to ensure transparency. The report also called for upward only rent reviews clauses to be removed from agreements.

The Response from the Pubcos 15. Pubcos’ high leveraged business model is based on securitization. There is around £20 billion of debt in the sector and the two largest pubcos are struggling to service their debt of about £8.5 billion. Most of the debt repayments are fixed at a rate which is very high compared to the current cost of capital, typically 6%. An analysis of Punch and Enterprise’s published accounts clearly showing that together Punch Taverns and Enterprise Inns need £730 million a year to meet their debt obligations, much of which is paid to oVshore bondholders. £730 million divided by the number of tenanted pubs owned by Punch and Enterprise equals about £50,000 per-pub per-year. Pubcos therefore need to maintain current levels of short term income to meet their obligations and to stop their business model collapsing. Despite the current recession, pubcos are continuing to raise beer prices and rents forcing many of their tenants out of business. As more of their pubs close and fewer people want to take a tied lease the pubcos are trying to get more income out of fewer and fewer pubs. Like the banks, pubcos have been caught out by over leveraging and securitized debt. 16. Figures which have been produced by Punch Taverns showing the reasons for changes of tenants or closures in their estate from the middle of 2005 to the end of 2007 shows that in that period 5,697 of their tenants gave up their pubs. This means that out of an estate of approximately 7,500 pubs, 75% of their Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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tenants have given up their pubs in a period of 18 months. Out of the 5,697 closures or changes of tenant, only 442 were because lease agreements came to an end. Other reasons include 1,119 tenants giving notice, 724 cases of the retailer/tenant business failing, 726 tenants choosing to abandon their lease, 189 where the pub has been repossessed because of debt or the tenant has bought out of lease conditions. A high turnover of short term Tenants at Will (TAW) tenancies—1,861 during the period—shows how the diYculties in running a tied pub business means that pubcos are finding it increasingly diYcult to find long term tenants and short term tenants are not willing to stay in the business. This level of closures and churn are not unique to Punch and will be replicated within other pubco estates. This high tenant turnover is clearly having a negative impact on the sector. It is clear from these figures that tied tenants are far more likely to abandon or lose their pub business than untied tenants. 17. Pubcos have not adopted the recommendations of the 2004 Select Committee report to improve the transparency of rent calculations and to make the costs of the tie clearer to tenants. Tenants are not seeing the whole detail of profit assessment, and the assessments are not being carried out in accord with accounting standards, applying fairness, prudence, knowledge and due diligence. In addition they have totally ignored the request to remove the AWP supply tie and when applying rent reductions have sought to increase their supply tie for other products such as wines spirits and minerals and in some cases even demanded control over tenant accounts. 18. The 2004 Trade and Industry Select Committee report recommended that tenants should be given information about the discounts that the pubcos receive from brewers and how this compares to the free market discounts available, and how much of the discount they pass on to their tenants. Despite this recommendation, it is clear that pubcos are not open about the discounts they receive. Figures taken from Punch Taverns and Enterprise Inns reports and accounts show that companies are typically receiving a margin of 85% on the beer they sell to their tenants. Pubcos told the Trade and Industry Select Committee in 2004 and repeated in their evidence to the current inquiry that they oVer good prices and that their tenants could not obtain the same in the open market. This is not the case. Pubcos oVer little or no discount to their tenants. Whilst oVering perhaps only £40/barrel discount to a tenant buying more than 500 barrels there are themselves obtaining £250/barrel discount from the brewers. A free of tie tenant with even a low turnover can obtain discounts of £170/barrel in the open market. A small free of tie group can find discounts of up to £220/barrel. It therefore is not true that the pubcos are oVering competitive prices. 19. Fair Pint believes that there is a clear legal principle that tenants under tied arrangements should not be financially worse oV than those who are free of tie and that is the only basis on which tied arrangements can be legal under EU competition law, but this has been ignored by all pubcos. We believe that the pubcos have been unwilling to introduce transparency into their business because it is clear that the benefits of the tie are few and the costs are very significant. We believe that the model is broken and it needs to be removed. 20. It is clear that the fact that the pubcos haven’t responded to the Select Committee’s recommendations in a positive way means that self regulation will be ineVective and there is now a clear need for legislation.

Seeking Solutions 21. We believe that evidence given to the Business and Enterprise Committee during the course of the current Inquiry shows that under current arrangements the vast majority of tied tenants are very significantly financially worse oV than those which are free of tie and able to buy beer on the open market. The existence of the pubco model has badly damaged the traditional relationship between the brewer, the publican and the consumer. 22. Transparency is essential in rent or franchise valuation calculations. The current system is opaque and we believe that pubcos make their calculations less than clear in order to maximize the rental returns received at the expense of their tenants. The 2004 Trade and Industry Select Committee report recommended that tenants should be given information about the discounts that they receive from brewers and how this compares to the free market discounts available, and how much of the discount they pass on to tenants. Despite this recommendation, it is clear that pubcos are not open about the discounts they receive. We therefore believe that there is a clear need for statutory regulation which gives tenants and prospective tenants clear and transparent information about pricing and discounts. 23. Fair Pint stated in our original evidence to the Business and Enterprise Committee that the BBPA Codes of Practice Framework on the Granting and Operation of Tied Tenancies and Leases, which were revised in 2005 is response to the Trade and Industry Select Committee’s report, had not increased transparency and did not reflect the Committee’s key recommendations. We believe that the evidence presented to the Business and Enterprise Select Committee clearly demonstrates that the current code of practice is failing and that there is a need for statutory regulation to ensure transparency and fairness for tied licensees. 24. We believe that there is a need for clear guidelines to the valuation process, which should be established on a statutory basis. We believe that the guidelines should make it clear that the method used to calculate rent should be carried out in accordance with national accounting standards and with knowledge, prudence and due diligence. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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25. The 2004 Trade and Industry Select Committee’s recommendation that tied tenants should be provided with a comprehensive breakdown of how their rent is calculated should become a statutory requirement. The details of the rent calculations should become an addendum to the lease together with any subsequent rent reviews. 26. Fair Pint recognize that some pubcos are seeking to use a “franchise” system as a replacement to leases in an attempt to circumvent calls for greater transparency. All franchise arrangements should be viewed in the same manner as tied tenancies and tied leases and as such they should also be free of all ties and have their rent profit based. 27. We believe that all tenancies should include included clauses which adjust rents to ensure that tenants can earn a wage not less than the National Minimum Wage including any adjustments for living in and holiday pay. 28. We believe that a national benchmarking system should be established to assist with the assessment of the fairness of rents charged to individual tenants. The system could perhaps be based on the ALMR’s existing benchmarking system. 29. All tenants should have access to arbitration as a statutory right and the costs of arbitration should be included as a cost against profits for rent purposes. Arbitration panels should be entirely independent and could consist of a surveyor, accountant and lawyer. 30. In order to promote the independence of the valuation process Valuers should not be appointed if they represent both the interests of the tenant and the freeholder. Action should be taken to remove any conflict of interest. 31. The current rent review system for pubs is unfair and has driven rents to an unsustainable level. The rent valuation system is based on profit sharing, but methods of calculating expected profits considerably under-estimates the true costs of running a pub and along with the tie is a principal cause of the current problems faced in the pub market. 32. The table below shows the membership of the RICS Trade Related Valuation Group which includes representatives of pubcos and valuers who represent pubcos but no representatives of the pub tenants who actually operate pubs. We believe that the Royal Institute of Chartered Surveyors “Guidance Notes relative to Pub rent and capital values” is working against the long term interests of the trade. RICS should update their guidance in conjunction with representatives of both freeholders and tenants to ensure that the guidance works in the interests of all parties and promotes fairness and transparency. A truly independent panel should be commissioned to review this issue.

RICS Trade Related Valuation Group FULL MEMBERS

Martin Willis FRICS—Chair Managing Director of Fleurets Chartered Surveyors Substantial clients include Enterprise Inns plc—http://www.fleurets.com/enterpriseinns/ Punch Taverns, Admiral Taverns, Marstons, Scottish & Newcastle Pub Enterprises http://www.mypublife.com/ my pub.asp

Rob May—Former Chair Chief Rent negotiator for Enterprise Inns plc and prior to that an advisor to Unique Pub Company

Christopher Honeywill FRICS Partner—Edward Symmons & Partners Act for Scottish & Newcastle (which owns 2,000 tied pubs through Scottish & Newcastle Pub Enterprises, and Royal Bank of Scotland (which owns 1,000 tied pubs managed by Scottish & Newcastle Pub Enterprises)

Gareth Jones FRICS Chief Operations OYcer—Colliers Cre Currently acting on behalf of Enterprise Inns plc, Punch Taverns plc and Mitchells & Butler plc in the sale of many pub freeholds.

Angela D Warr-King FRICS MCIArb Director—Hotels & Leisure—Grant Mills Wood Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Trevor Watson Director of Valuation—Davis CoVer Lyons Clients include Enterprise Inns, Punch Taverns, InnDeeD Pub Company, London Town Pub Company, Royal Bank of Scotland (1,000 tied pubs)

David Butters Partner—Gerald Eve Act for Greene King, Thwaites, Marstons, Whitbread and Punch Taverns on rating and other matters

Graham Coulter Associate Director—Pinders Pinders is wholly owned by Christie Group plc which is probably the largest UK selling agent for Enterprise Inns plc and Punch Taverns plc http://www.christie.com/splash

Kelvin King Valuation Consulting Act for Edward Symmons & Partners (see above) and Ernst & Young which audits both Enterprise Inns and Punch Taverns.

Paul Simpson HMRC—Capital Taxes Shares Valuation

Samantha Rowland FPD Savills Clients include Punch Taverns and Royal Bank of Scotland (1,000 tied pubs)

CORRESPONDING MEMBERS

Amanda Barber FRICS GVA Grimley Clients include Scottish & Newcastle Pub Enterprises and Royal Bank of Scotland

Gareth Morgan FRICS Managing Director—Cavendish Tate Commercial Limited

Mark Taylor Associate Director—Jones Lang Lasalle—Rating

33. We accept that as a result of the recommendations of the 2004 TISC report many pubcos have removed upward only rent reviews from leases. There is however clear evidence that many pubcos have replaced upward only rent reviews with RPI indexation which has the same eVect as upward only rent reviews and are inequitable at a time when beer sales are falling and therefore pub tenants’ profits are declining. Pubcos have in other cases expanded the tie to other products as a result of removing upward only rent reviews and therefore increased the cost to the tenant. Pubcos should remove all upward only rent reviews or variants. Where deeds of variation are to be used to vary the lease to remove the upward only rent review then the pubco should not be allowed to introduce or retain terms that enable it to avoid a rent review it is feels that there is a risk of the rent being reduced. 34. In our original submission we showed how the AWP tie allows pubcos to take three slices of money from tenants AWP income. We believe that this is manifestly unfair and we believe that AWP ties should be removed. This will have the eVect of increasing competition in the amusement machine market by allowing companies to approach tenants other than those on pubco approved lists which have to pay commissions to be on those lists. 35. The practice of placing restrictive covenants on former pub premises to prevent them re-opening as pubs once they are sold is clearly an anti-competitive practice and should be prevented. We also believe that when pub freeholds are sold the property should be first oVered to the sitting tenant. 36. We believe that the current system of assessing the rateable value of pubs lacks transparency and works against the interests of tied tenants. We therefore recommend that tenants should be allowed to consult and use their own rating advisers and that 50% of the upfront cost should be borne by the freeholder—with the remaining 50% included in the profit assessment for the rent calculation. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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37. The current system for establishing rateable values for forms was agreed between the BBPA and the Valuation OYce Agency. The BBPA does not represent publicans and should not be involved in establishing the basis of a tax system of pubs. The rateable value of a pub is supposed to be the equivalent of the market rent for a particular year. It is our submission that the proposed revisions to the system for establishing rents should be applied to assessment of rateable values. 38. All pubcos should produce a statement of their exact insurance cover and tenants should be able to procure in writing a quote from an insurance company that can meet British Insurance Standards and is not less than the same exact insurance terms as stated by the pubco then the pubco must reduce its premium to its tenant accordingly.

Temporary Measures Towards Final Freedom 39. Fair Pint accepts that total removal of the tie may take time to implement as its removal will trigger rent reviews. 40. Fair Pint submits that if a period of time is required for removal of the tie then that could be set to occur so the tie on new agreements cannot extend for more than 24 months without both landlord and tenant having the ability to opt out of that agreement. For existing agreements either party could opt out after 24 months or the next rent review, whichever be the sooner. 41. We believe that allowing tied pubs to choose two free guest lagers or beers, to be chosen by the tenant would be an easily to implement temporary measure which could help the financial position of the thousands of pubs which are currently facing closure.

Conclusion 42. It is clear that the tie is the major cause of the problems currently being faced by the pub sector. This is why free of tie operators have been the ones who have been able to adapt to current circumstances and build market share. It is clear that the “pubco” business model is broken. The huge diVerentials between the cost of beer available to free of tie operators and the price charged by the “pubcos” combined with unsustainable levels of rent are the reasons why tied operators are finding it so diYcult to make money. 43. The only way that the current problems being faced by the sector can be rectified is if tied arrangements are changed to ensure that tied tenants are not worse oV than those who are free of tie. We believe that the pubcos have been unwilling to introduce transparency into their business in terms of pricing and rents because it is clear that the benefits of the tie are few and the costs are very significant. We believe that the model is broken and the tie needs to be removed. 44. It is clear that the fact that the Trade and Industry Select Committee’s recommendations in 2004 were ignored by the “pubcos”. It is therefore clear that that self regulation will be ineVective and there is now a clear need for a legislative solution. March 2009

Memorandum submitted by Stephen Broadhurst

Executive Report This report is based upon very real personal and professional experience. It wasn’t a very pleasant one. This report sets out to explain the events leading up to this statement, the key points being: — The Tenant receives absolutely no real benefit from a beer tie. — The role of Business Development Manager is critical communication link to the brewery but is grossly ineVective and biased against the Tenant. — There are no other eVective links of communication to anybody else within the organisation at any time, regardless of the situation or level of urgency. — There are no complaints procedures. — There are no dispute procedures. — There are no appeals procedures. — There is no disclosure or information forthcoming from the Brewery. — There are no Codes of Conducts. — There is a biased and unpublished “fine” procedure. — Brulines is supposed to be unbiased. It is strictly biased in favour of the Brewery. — If the public house is struggling to survive there are no concessions or help. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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— The whole public house experience/involvement can potentially ruin lives for both individuals and families. — The brewery fails to fulfil its service agreement but rigorously enforces the Tenants purchasing/rent side of the agreement. — The Brewery’s favourable and only solution to any dispute is to issue a Statutory Demand. End of.

1. Personal Profile I am currently serving as a Borough Councillor in Macclesfield until 2009. I have also been elected onto the new Cheshire East Council until 2011. I am also a 43year old Business Consultant currently residing in Macclesfield. As part of my professional development I decided to try my hand at operating a public house. As a result of this (recent) experience I would like to submit the following evidence to the Committee.

2. Introduction Public House referred to: Bate Hall Inn, 39 Chestergate, Macclesfield, Cheshire. SK11 6BX Brewery: Marston’s (referred to as either Marston’s or “the Brewery” for the benefit of this report). For the purpose of this report, Stephen Broadhurst is both the Author/Tenant that is referred to in this report.

3. Time Line June 2006—Initial interest by Author expressed. June 2006—The Bate Hall Inn was registered as a limited company. February 2007—A “Square Deal” Agreement was signed. February 2007—Bate Hall Inn Ltd. opened for Business. January 2008—An “Open House” Agreement was invited to sign. March 2008—Bate Hall Inn Ltd Closed for business. April 2008—Marston’s issues a Statutory Demand on Tenant. May 2008—Judge sets aside Statutory Demand.

4. Recommendations — There is urgent need for reinforcement of existing regulations as well as further regulation of the industry. — An independent body to be established to arbitrate in any complaints/disputes. — A full and factual Code of Practice be published relating to all the procedures, implications and events that can be encountered when signing the diVerent agreements. — The tied purchasing price to be reduced to the free trade purchasing price. — Brulines to be completely unbiased. — Insurance against legal proceedings be made available. — A statute of limitations being established against further legal action being taken. — The Business Development Manager title being removed as it is misleading. — The Business Development Manager being stripped of power and reassigned relevant role and responsibilities appertaining to the position. — Deposits are held in a neutral Bank Account and arbitrated by a third party. — A clause to be written upon failure of a dray delivery a Tenant can purchase from a third party without repercussions. — Clear and realistic purchasing targets be established. — Fair rents be arbitrated by a third party. — Clear and concise calibration records are made to cellar equipment. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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5. Background June 2006, the original intention was for the Author to purchase the lease from the previous landlord Mr R. The Bate Hall had been shut for approximately two months at this stage. Due to unknown reasons Mr R was prevented from reassigning the lease over to the Author. Again for specific details unknown, Marston’s decided to bankrupt Mr R at Macclesfield County Court in November 2006. Two days after Mr R was made bankrupt, the Author was approached by the Business Development Manager from Marston’s, with an oVer to sign a lease and reopen the Bate Hall.

6. Lease/Tenancy The Author signed a Square Deal Agreement in February 2007 this basically meant that either parties could give a 24hr notice to vacate the premises and the business. This was interim agreement signed under the guise of an Open House Lease (henceforth and for the purpose of this report will be known as a Full Tenancy Agreement) being made available. It was believed that the Full Tenancy Agreement was being drafted and would be made available within weeks. The Tenancy agreement is a 21 year lease where the lease cannot be sold onto another party for two years after signing. The lease can only then be sold on, but only with permission from the brewery. The County Court was made aware of the intention of the Author to buy the lease from Mr R in an eVort to prevent a bankruptcy judgement on the day of the case. Marston’s rejected this and Mr R was duly made bankrupt. If the lease cannot be sold on for any reason, the occupier has no choice but to continue to be responsible for the business ie Business Tax, Utilities, rent etc whether the Business ceases to trade or not.

7. Advantage The one and only advantage known to the Author, to signing of the Full Tenancy Agreement is that it consists of rent and beer discounts. This is “designed” to incentivise the tenant to sign over from eg the “Square Deal” to a Full Tenancy Agreement. For example, upon signing the Full Tenancy Agreement the Bate Hall weekly rent would have reduced from circa £650 per week to £450 per week. On average a barrel/ keg would reduce by £35 each. All agreements consist of a full drinks tie. The Full Tenancy agreement was made available but never signed by the Author. The Bate Hall finally opened on 21 February 2007 after being closed for 10 months. A deposit of £7,000 was given to Marston’s to which the Author has no chance of recovering.

8. Communication Communication is primarily with, and is impossible to have, from anybody within Marston’s apart from with the Business Development Manager.

9. Cash/Credit Account Marston’s operated two accounts, a Cash and Credit account. A credit account allows two weeks payment grace from order with the total amount Direct Debited out of the Public House trading account.

10. Cash Account The total beer order and rent to be paid in cash into the Brewery’s bank account and must be made in full, before any dray delivery is made.

11. Complications This causes complications if the business is struggling with its cash flow eg you can only pay for what you can aVord or use a credit card to which, a further handling cost is imposed by the Brewery. There are instances where the beer delivered runs out at an inopportune moment ie the Bate Hall beer order was placed on a Monday for delivery Tuesday. There were instances where the cellar was running dry Thursday/Friday prior to a weekend. This was further compounded if an event was being held eg a birthday party the options under these circumstances were to either: — close the business until the next “free” dray delivery; — have an emergency delivery costing circa £80; — borrow from a third party; — pay by personal credit card; — buy-in; or — pick up from the brewery shop outlet initially located near Warrington. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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With the latter option being the “legal” and so, the preferred option. This process worked fine for the Bate Hall upon the first three occasions until Marston’s cut this option oV without prior warning eg the final option given to the Author when the Bate Hall ran dry, was to travel from Macclesfield to the Mansfield Brewery shop (with Warrington being the closest and initially used but still a five hour round trip), which is an 8hr round trip in order to purchase two kegs of lager which is not cost eVective. Emergency deliveries were costly and sometimes could be up to three days later than required. Borrowing was frowned upon from a third party and impossible from a managed Marston’s public house, even if it was local and “awash with drink”. Buying in was deemed illegal and is subject to an undisclosed fine system. This was costly fine is imposed and non-negotiable, but landlords have to put up with it because it has to be balanced against the “nightmare” of any public house running dry. The nightmare being, if the Business runs dry, it will fail as it switches customers oV when they cannot buy their chosen product and ultimately will ruin the business both in goodwill and future trading. If an event is on, the Tenant has a contractual obligation to meet and service that requirement. There are choices to be made but they are extremely risky from a business perspective.

12. Fines Marston’s operates a “fine” scheme that is not publicised or can be appealed against. The fine is usually imposed as a result of buying in from a third party. Marston’s can impose any amount of monetary fine that it chooses, usually thousands of pounds, payable with immediate eVect. If the Tenant refuses or cannot pay, the brewery will not supply any drink to the premises from that moment on. No prior warnings are given. The first a tenant knows about the fine is when they try to place a beer order for that week. This forces the tenant to either pay up or buy in, creating a viscous circle of breaking the tie for the business to continue trading. Breaking the tie is believed to be an oVence and was partly the reason for Mr R being made bankrupt. A second reason for breaking the tie is for being on cash account. The Tenant can only pay what they can aVord for that weeks delivery. If they require more drink for eg a party booking at the weekend, they are either forced to buy in or place an emergency delivery at a cost of (for Marston’s) £80. If a delivery fails, the Tenant has no choice—under no circumstance are they allowed to buy-in—this seriously jeopardises and restricts the running of the business. It is also impossible to borrow drink from other group public houses especially the managed houses. Inevitably the only realistic decision faced by the Tenant is to buy-in. The Author of this report, on more than one occasion, was faced with literally begging the Business Development Manager to supply beer. This was compounded when the BDM was away on holiday and the Author couldn’t find anybody else to beg to.

13. Discounts The brewery discounts are a con. The Tenant is led to believe that the discounts are based upon a predetermined target been achieved. This target is supposedly based upon previous trading conditions and with mutual agreement between the Tenant and Brewery. This isn’t the case. The Brewery does not only impose the target, it is also grossly misleading. The target is buried deep in the agreement together with a vague description termed “compounded barrelage”. Compounded Barrelage is a number of barrels/kegs that make up to equal 36 gallons. There are 9 gallons in a barrel and 11 gallons in a keg. For example, and for ease of calculation, the Bate Hall target was 196 barrels, the “real” target is in fact 196*4barrells, as 9gallons*4barrells%36%a Compounded Barrel. So the Tenant has to buy 784 barrels in order to reach the stated 196-barrel target before qualifying for a discount. However, the discount is only applied to anything above that and not across the whole amount ie 788 barrels bought % 4 barrels above target, a very small discount is only applied to one barrel. Even with discount, a barrel/keg is not as cheap as buying it from a third party wholesaler. The discount mechanism is based upon quarters of the year and cannot be carried over to the next quarter. It is confusing especially when trying to factor in 11 gallon kegs into the equation, and Marston’s are not forthcoming with any of this information or provide clarity. The Author was assured that he would get maximum discounts from day one of opening, he didn’t.

14. Third party wholesalers A third party wholesaler can sell a barrel/keg supplied from eg Marston’s for circa £35 less than the Tenant pays directly to the Brewery. So even when the discount is applied, it still isn’t cheaper than the same product supplied to and from a wholesaler.

15. Bankrupt Marston’s tried to bankrupt the Author on the 2 May 2008 due to disputed alleged rent and buying in allegations. They were unsuccessful. A Full Tie Tenancy agreement was made available for the Author to sign Christmas 2007; pressure was placed upon him to sign but was resisted by the Author due to the previous 9months experiences and dealing with Marston’s. Thought must be given as to whether the Authors reluctance to sign the Full Tenancy Agreement played a deciding factor in Marston’s next course of action. The proceeding action was a personal and professional nightmare. It is believed by the Author that this refusal started the chain of events that partly led to Marston’s issuing the Statutory Demand. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Communication to resolve outside of this bankruptcy process was made. Despite numerous written and verbal requests being made, each were either totally ignored or passed from the CEO to Director etc. downward until it arrived back down to the Business Development Manager. Marston’s resolves disputes by going straight to bankruptcy proceedings ie by issuing a statutory demand. They tried to bankrupt the Author based upon three diVering amounts of monies owed according to their internal accounting systems. Two of these accounts clearly showed some finances dating back to Mr R, to which they tried to attribute and make the author pay for. The Author refused. Despite two attempts to bankrupt the Author Marston’s were unsuccessful. Marston’s next available option is to try and obtain a County Court judgement against the author for alleged monies owed. This can be executed at any time and is not subject to a statute of limitations. As of yet, Marston’s (four months after the bankruptcy case and six months after the Bate Hall closed at the time of writing this report), have not taken this option, but this report may result in action being taken against me as an individual. It must be noted that Marston’s has the benefit of being able to apply the best lawyers to pursue cases whilst the Tenant cannot aVord that particular luxury. In essence the Brewery would rather spend large sums of money trying to bankrupt an individual than spend some money trying to help them.

16. Brulines Brulines eVectively “police” the Tenant and are paid to do so by the Brewery. Brulines place monitors in the cellar to measure beer flow. Remote checks are made to compare brewery purchases against actual flows. If anything “suspicious” is identified a “surprise visit” by Brulines is carried out. This comprises of an audit of the cellar and the bar area in full view of customers. Photographs of the bar optics, spirits, fridge contents are taken and are compared to the purchasing history. Bar codes are also recorded for identification purposes. Any discrepancy is treated as “buying in” with no defence being able to submitted, or non-that anybody is prepared to consider. A sizeable fine is then imposed. The author was unable to retrieve any information from Brulines to enable him to defend himself in court. The Bate Hall meters weren’t calibrated. Another party may not realise that this is a perquisite requirement; up-to-date calibration records have to be made.

17. Conclusion The Brewery is in the business to sell beer, but they make conditions extremely diYcult to purchase from them. Marston’s don’t seem to care as long as you have signed a lease and are “ultimately delighted” if a Full Tenancy Agreement has been signed, as they will get their money regardless of the pubs trading position and certainly pressurise the unsuspecting into signing it, with false promises of discounts and security. This report would go as far to state that the system is loaded in such a way that the Brewery is geared up for, and gets some sort of sick enjoyment out of bankrupting people, as it quickly moves to a statutory demand option without, and before, providing a reasonable business support package. Indeed, a Brulines representative cheerfully told the Author that “nobody ever wins against the brewery and to give up now!’ The Author didn’t. “Winning” is achieved by the Brewery, ultimately and in the first and only instance, by instigating bankruptcy proceedings against the Tenant, who is fighting against rules and fines that are unpublished and strictly biased in favour of the Brewery. This process is also designed to try and frighten the tenant. The Brewery has a bottomless purse when it comes to insolvency proceedings. It is the Authors opinion, that the practices outlined within this document are immoral, damaging, threatening, extortionate, potentially life ruining, arrogant, aggressive and what tantamounts to an overall disgusting malpractice by the Brewery, which have all been experienced and concluded from, within a relatively short time-scale. I am a professional Business Consultant and in any other industry, these practices would be at least deterred, be open and honest or at best made illegal. The contents of this report are considered true and accurate to the best of the Author’s knowledge. 22 September 2008

Memorandum submitted by The Federation of Licensed Victuallers Associations

Present Trading Conditions To say that the on-sales section of the licensed trade is struggling is an understatement. Public houses are being boarded up on a regular basis, many of which will never re-open. Not only are many of our members losing their life savings but also their homes. The British public are now losing the only venue where they can go and relax in a safe environment. Nobody in Parliament accepted the damage the smoking ban would cause to the trade when we requested segregated smoking areas with updated ventilation. The non smokers who we were told would now flock to the public house or club never materialised. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Increased energy costs are now a major part of a public house/club expenses which also aVect our customer’s spending power. Supermarkets are being allowed not only to sell alcohol products cheaper than in 1986 but in certain instances below cost. Beer duty above inflation introduced by the Treasury can only add to the disaster. Many licensees are under the impression the government is no longer concerned about the future of the community and rural public houses and the essential services it gives to the public ie places to meet in a warm and friendly atmosphere, reasonably priced meals, millions of pounds raised for charities and sponsoring of local amateur sports teams.

Has the Licensing Act 2003 had an eVect on competition within the market? Whilst the flexibility of opening hours has allowed public houses to compete with night clubs to stay open longer the majority of community and rural public houses only want to open until midnight, something they would have accepted rather than the full cost of the implementation of the 2003 Act. It is the supermarkets who have benefited by applying for and being granted licences to stay open during their full trading hours. Previously supermarkets had all their alcohol in an area they had to segregate whilst open for other business out of licensing hours. Now every part of the supermarkets has alcohol on sale with special oVers, some selling at a loss.

To what extent have revisions to the framework Codes of Practice met the Committee’s concerns? Following the 2004 inquiry the Federation of Licensed Victuallers Associations sought and gained meetings with the British Beer & Pub Association to review and update their Code of Practice. It was on the understanding that the new code would be accepted by all their members. The new “Codes of Practice Framework on the Granting and Operation of Tied Tenancies and Leases” was introduced in November 2005 and has successfully been used on behalf of our members with companies aYliated to the BBPA. The area of the code which concerned our members is the amusement machines which is not fully explained as to how many bites the company receives ie site rents and tenants share which they rentalised and how little licensees actually receive. The Federation of Licensed Victuallers Associations is represented on a British Institute of Innkeeping Committee which is reviewing and achieving improvements in not only National pub company codes but also regional brewery companies before they receive accreditation of their codes.

To what extent are the codes applied by the Pub Companies? There have been a number of occasions when the codes have not been fully implemented but when brought to the attention of a present or more senior member of the company the decision has been reversed. Codes of Practice Framework on the Granting and Operation of Tied Tenancies and Leases (Second Revision November2005)—Item 4 Material Changes/Exceptional Circumstances. We are pleased to say that this code agreed with the British Beer & Pub Association and others agreed with the British Institute of Innkeeping are reducing rents and giving assistance to licensees experiencing diYculties through no failing of his/her own.

Is there a need for further regulation of the industry? There is no doubt many licensees would like to see the tie removed and whilst we can understand their views we are concerned by the implications of the removal of the tie. If one reads the second paragraph of the summary of the Second Report of Session 2004–05 by the House of Commons Trade and Industry Committee they will understand our concerns if the tie is removed—“We are not convinced that the division of the wholesaling and property functions of pubcos, ie the removal of the beer tie, is advocated by many witnesses, would necessarily benefit tenants. We felt it likely that in the absence of the tie pubcos would exercise their contractual right to raise property rents to compensate for the loss of income from beer sales. Indeed, if brewers were free to supply all public houses on a wholesale basis it is possible that major brewing companies could achieve a dominant market position to the detriment of individual public house operators.” The Federation of Licensed Victuallers Associations has always promoted the view that all tied licensees should receive a share of the discounts the pub companies gain and that this should not be rentalised. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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When Grand Met introduced the Inntrepreneur lease in the 1980s it led to many financial problems for their licensees until a Courage takeover of the Inntrepreneur Leasing Company who then brought in discounts that were written into the lease. We believe freedom of tie (which has the support of many licensees) would lead to the Pub Companies and Regional Breweries implementing the clause which allows them to seek a market review of the rent within one month of the release of the tie. The new rent would be based on discounts at present achieved by the Pub Companies. Discounts would be dramatically reduced by the brewery when negotiating with thousands of licensees rather than a limited number of companies. Where a licensee signed an agreement with a single brewery to get the best deal available they could then be tied for their drinks which would lead to a reduction in the selection of drinks for their customers. Supply agreements in the free trade would have strict conditions in them which must be adhered to or penalties may be imposed. If the pub companies lost their tie licensees would be dealing with a property company who would have adiVerent agenda and they would lose some of the benefits that are available at the present time. It is our opinion that the introduction of any further regulations to the industry would only lead to extra costs on the licensed trade which as previously stated is already struggling. What the Federation of Licensed Victuallers Associations requires for our members is a share of the discounts achieved by the pub companies and managed house section of the regional breweries being given to all tied licensees plus a fair share of the machine income which is not rentalised. September 2008

Memorandum submitted by David Morgan

1. Previous TISC Recommendations and their Implementation over the Previous Four Years 1.1 The profit assessment method of calculating rent should be carried out in accordance with national accounting standards and with knowledge, prudence and diligence (144). 1.1.1 A significant proportion of my professional involvement of licensed and leisure property over the last 34 years, has been in respect of issues concerning rent review. As a Fellow of the Royal Institution of Chartered Surveyors, I regularly meet similarly qualified individuals acting specifically under the instructions of Pubcos that form the vast majority of the freeholders of the premises with which I am involved. The method of valuation adopted nationwide and by all specialist licensed property valuers, is that of the profits test in the assessment of open market rental, either upon review or lease renewal. 1.1.2 The objective of the profits test is to eVectively replicate the Trading and Profit and Loss Account of the hypothetical lessee in occupation with the exception of the input cost of the rent, thereby achieving a surplus or divisible balance which is split evenly between landlord and tenant as rent and tenantable remuneration. Rent review clause disregards are also infused which, to a degree, can make the valuation artificial if properly assimilated. 1.1.3 The key to the profits test is the first input which is a genuine assessment of fair maintainable trade that should be achieved by a reasonably competent operator, having adequate market knowledge and operational skills and allowing for the expectation of consistency over the years until the next rent review, which would enable a test of genuine profitability to be made other than in only the first year. 1.1.4 Having established that initial level, appropriate gross profit margins are then assessed based upon the specific on site circumstance of the outlet concerned. There is considerable variation in respect of gross profit margins, dependant upon immediate and direct competition. All items of income are analysed, namely drink, food, accommodation (if any), amusement machines and any other sources of income. 1.1.5 From the assessed gross profit, a deduction is then made for establishment overhead expenditure excluding rent. Allowance should also be made for interest on working capital and for the notional acquisition of the inventory at in situ value, allowing for interest and capital being repaid monthly in arrears, usually over a maximum period of 10 years. 1.1.6 The assessment of fair maintainable trade must include the relevant disregards set out in the rent review clause of the lease of the premises and in accordance with the Landlord and Tenant Act 1954 and subsequent legislation. (See 2. below). 1.1.7 It is accepted that the various input factors are a matter of personal/professional interpretation and should as closely as possible, mirror relevant on site circumstance. It is acknowledged that some leases require the tenant in occupation to produce annual accounts and copies of VAT returns. In those instances, Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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it has to be considered that the freeholder/landlord should have an accurate insight into the detail of the trading operations of the premises. Tenants in occupation can also volunteer their accounts, should they feel so minded. 1.1.8 The calculation system, however, is open to abuse which very often occurs in the justification of a significant increase in rental upon either review or lease renewal by predicating “potential trade”. 1.1.9 As a result of my personal day-to-day involvement in rent review, experience indicates that the vast majority of initial rent assessments over-estimate fair maintainable trade, over-estimate gross profit margins and under-estimate establishment overhead expenditure. The resultant is always a significantly inflated divisible balance which if split evenly between parties, produces a similarly inflated rent justification. 1.1.10 There can be in excess of 35 input factors in a profits rent calculation, all of which are accepted as being capable of having variation. National accounting standards require the detail of these input factors to be revealed much in the same way as a detailed Trading and Profit & Loss Account is prepared for taxation purposes. 1.1.11 I have never found any such detail being included in the calculation exercise by the representatives of the Pubcos unless and if, third party referral is the only method of resolution of the rent review. 1.1.12 I thus conclude that Recommendation 144 is not being adopted by any of the Chartered Surveyors as Pubco representatives that I regularly meet in the open market. 1.2 A Comprehensive breakdown of how the rent is calculated should encompass and reveal the whole detail of the profit assessment and how the lease conditions have been interpreted (145). 1.2.1 The first line of direct relationship between a Pubco and the supply tied lessee, is that of the Business Development Manager or Business Relationship Manager (BDM/BRM). In the days of brewery companies, these same individuals were known as “Divisional Managers” (DMs). None of the individuals concerned are Chartered Surveyors and some, but certainly not all, may have had direct trade experience as previous licensees. 1.2.2 Rent reviews are generally perceived as adversarial. Starting oV with this basic premise, the field of negotiation is widened considerably in that the basic viewpoint is that the Pubco (eVectively a property company rather than a brewer), seeks to maximize rental income and enhance shareholder value. The tenant seeks to minimize any form of rent increase and thus ensure maximum operational profitability. Thus from the outset, the objectives of both parties are at opposite ends of a particular spectrum. 1.2.3 I have not been involved in any initial exploratory discussions between tenant and BDM/BRM. I would not expect to be involved in these discussions as it is a natural aspiration of any tenant that he/she can successfully resolve a rent review negotiation. The Pubco representative approaches the situation with three aspirations: — a sky-high rent demand that only an idiot might accept, but you never know; — a middle ground rent review that has been authorized by his superiors as a settlement level that can be justified internally; and — an ultimately lowest level settlement that is either accepted after significant negotiation processes have been exhausted, or by third party referral (arbitration/independent expert). 1.2.4 There are thus three diVerent levels of rental and initially obviously the highest is the only one that is quoted. Thus the process is adversarial. 1.2.5 Anecdotal evidence leads me to conclude that there is never any paper justification for the first aspirational level of rental. If pressed and indeed it is accepted that a large number of tenants do not understand that they can request this information, the Pubco representative will never produce the justification for the first level of rental and just inform the tenant that the company has calculated the rent with their best interests at heart and they should just accept it, otherwise arbitration will cost thousands of pounds. 1.2.6 If the initial negotiations are unsuccessful in producing an agreement, an “oVer to settle” is then made with great reluctance, which is the second level of rental. Again, no paperwork is ever produced in the justification of that level unless specifically requested. The “theatre” of the reverse side of a laptop computer is always used as a “prop” by way of justification. 1.2.7 Recent examples of ongoing rent negotiations in 2008 have produced exact replicas of the above scenario. They include: — The Park Royal, Exeter—Enterprise Inns; — The Filly Inn, Lymington—Punch; — The Colliers Arms, Skewen—Enterprise Inns; — The Black Horse, Chippenham—Enterprise Inns; — The Sir Robert Peel, Kingston-on-Thames—Punch; — The George, Wedmore—Admiral Taverns; and — The Papermaker’s Arms, Dartford—Wellington Pub Co. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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1.2.8 As a sample of the ongoing negotiations that occur in every single instance, I then formally requested by letter, the provision of a detailed justification of the rental assessment. In every instance, the justification was on an abbreviated form showing, for example, total sales ex rather than breaking down the sales into their constituent elements. 1.2.9 Expenses are always shown as a single aggregate sum and are never broken down into individual input items. There is always a complete lack of detail as to how the summary income and expenses were achieved and until third party representation occurs, items such as working capital, ullage, wastage, purchase of the inventory and especially rent review disregards, are all ignored. 1.2.10 A particular area of concern is the interpretation of lease clauses regarding rent review disregards. The three items of concern are: — The disregard of tenantable goodwill. — The disregard of the fact that the tenant has been in occupation. — The disregard of structural works undertaken by the tenant at the tenant’s expense with landlord’s approval. 1.2.11 I have never encountered a rent review negotiation that initially ever accepted that either of the first two items as outlined above should even be considered. In respect of the third item, a curious situation exists that is exploited by the Pubcos, should the situation arise. I deal with the issue of structural alterations in a separate heading below. 1.3 The detailed profit assessment should form an addendum to leases to ensure transparency for any subsequent review or assignment (145). 1.3.1 Since the issuance of the voluntary regulations by the TISC in 2004, there has been no discernable transparency in the detailed profit assessment in the many hundreds of rent review situations in which I have been personally involved. There has been no attempt by any Pubco to be transparent in the calculations even when forced to reveal this information. As outlined above, the very last thing that a BDM/BRM indicates to the tenant, is the method of calculation of the first (and highest) levels of rent in what again must be repeated, is an adversarial confrontation. 1.4 The tied tenant should not be financially worse oV than if they were free of tie (133). 1.4.1 There is no obligation that a Chartered Surveyor should have to follow this method of logic. In the regulations that have been published in the RICS Valuation Standards (Jan 2008) and associated specific detailing as a result of the Trade Related Valuation Group and the publication “The Capital and Rental Valuation of Restaurants, Bars, Public Houses and Nightclubs in England, Wales and Scotland” (2003), there is no specific guidance as to how to formulate the obligation of equality. As a direct result of the lack of implementation either by the Pubcos or the RICS of the directive 133, there is a uniform misunderstanding within the body of Chartered Surveyors serving the Licensed Valuation market as to how the assessment of rent review should be undertaken in accordance with the TISC recommendations. 1.4.2 There has been minimal attempt to diVerentiate between supply tied and supply free in the profits test calculation by the valuers acting for Pubcos. However, the prime source of comparable evidence has always been other supply tied public houses which has meant that there has been no reference or obligation to equate supply tie with supply free. From a personal standpoint, I have not attempted to force the issue in the absence of RICS guidance. 1.4.3 Rent reviews are often undertaken with the benefit of selected comparables. The Pubco, however, has a manifestly unfair advantage as it has access to all of the comparables of its own estate, either locally or regionally. There is absolutely no opportunity for a tenant to have access to any of this database and from my personal experience it is never oVered for the assistance of the tenant, other than to cherry-pick the very highest examples to prove a rent increase. In almost every instance, the comparators are of other tied houses with no direct comparisons to supply free leaseholds as in reality, these outlets are not contained within a supply tied Pubcos estate. 1.4.4 From my direct experience, no Pubco valuers attempt to exercise the directive 133 in its correct understanding. 1.5 Removal of upwards only rent reviews (151). 1.5.1 Both Punch Taverns and Enterprise Inns have openly declared that in new leases, they would instigate upwards and downwards rent reviews. In this respect, new leases issued by both companies do indicate that at the fifth year on a quinquennial rent review basis, reviews will be undertaken on an upwards and downwards basis. 1.5.2 However, I consider that a rent review actually means a proposed change in rent when the existing rent is reviewed by whatever means at whatever interval. Thus annual increases in accordance with the uplift of the Retail Prices Index (approximately 4.25% p.a. and rising) in the intervening five individual years prior to a quinquennial rent review, actually mean that the rent is being increased on a compounded basis by approximately 25% upwards only. It appears that this indexation goes completely against the core issue that every rent review should be upwards and downwards. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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1.5.3 Examples of this practice of upwards only reviews, exist as follows: — In the last four years, both the Punch Growth Lease and the Enterprise Inns Retail Partnership Agreement state that there shall be annual rent increases in accordance with the Retail Prices Index. In all of its 80 or so years of established use, the Retail Prices Index has never seen anything other than upwards movement. — As an example of the current practice, advertisements issued in July 2008 by Fleurets advertising new leases, indicated throughout all of the prospective lease documents under the heading “Tenure” “the property is available on a new Enterprise Inns lease for a term of between five and 25 years with a tie for drinks products. The rent will be stepped during the first year to a passing rent of £ . . . pa thereafter which is subject to annual RPI increases and formal rent review after 5 years. Machine income is shared between Enterprise and the retailer”. 1.5.4 In the Enterprise Inns Retail Partnership Agreement which is now common throughout the entire estate and is the basis of lease agreements in the generality,Schedule 3 contained within that agreement, deals with rent reviews. Schedule 3, Section 1”Annual Reviews” states in paragraph 1.1 that the rent will be increased by the same percentage as the increase in the Retail Prices Index over the 12 month period since the previous annual review date. In paragraph 1.3, it clearly states: “if the index has decreased during the relevant 12 month period, the rent will remain the same”. Quite simply, the rent is not capable of a downwards review until the fifth year. 1.5.5 Schedule 3, paragraph 2.1 does not actually state in simplicity that the rent should be reviewed upwards and downwards. The paragraph actually states: “On each rent review date the rent will be reviewed to the market rent at that date”. There is then reference to a hoped-for amicable negotiation and in the absence of that amicable settlement, reference to an independent surveyor. Having set out the detail of the reference to the independent surveyor, paragraph 2.5 states: “The reviewed rent may be higher or lower than the previous rent”. Thus the clear inference is that if an amicable agreement is not reached, the only method of establishing market rent and thus a downwards rent review, is by recourse to third party or an independent surveyor. 1.5.6 Even if the rental is obviously deemed to be reduced, it is the exception and certainly not the rule that a nil increase will be proposed, rather than a genuine long term (five year) reduction. 1.5.7 It is appreciated that Enterprise Inns and Punch Taverns oVer concessionary rentals. This should not be confused with a permanent downwards rent review cycle as a concessionary rent is exactly what it means, ie a short term alleviation of an existing high rent and a return back to that rent after a limited period of time. Certain circumstances also dictate that the concessionary rent must be repaid. 1.5.8 Concessionary rent opportunities are sometimes oVered under extremely constraining circumstances of ultra confidentiality and on the basis of a sacrifice of any supply free advantages which would then disappear for ever and the implementing of RPI indexation where previously it did not exist and further machine ties. Concessionary rents are only ever oVered with considerable constraining further ties and obligations. 1.6 Removal oF AWP tie (130). 1.6.1 Since 2004 I have never encountered a situation where any Pubco has removed the AWP tie in any supply tied leasehold. This recommendation has been completely ignored. 1.6.2 There is substantial evidence that there are considerable royalty payments paid by the amusement machine operators. For example, in the published accounts of Enterprise Inns 2007, the machine income was shown as £29 million as opposed to 2006 £26 million. This income could only come from royalties as Enterprise Inns do not operate a managed estate. If a machine tie did not exist, there would be no royalty payments and thus the on site machine rental payments to the supply tied lessee would be considerably lower than as at present.

2. Third Party Referral 2.1 The opportunity exists in every supply tied lease for a rent to be determined by third party referral. This is usually to arbitration, although certain leases specifically state that independent expert shall be the only method of dispute resolution. 2.2 The Pubcos have a considerable advantage in this situation in that they eVectively have a bottomless cheque book in respect of fees, whereas the supply tied tenant is the exact opposite. I have first hand knowledge of BDMs/BRMs stating that if arbitration is sought, the tenant will incur many thousand pounds worth of expenditure and in every instance, the Pubco will win and their associated costs will also be added to the costs of the tenant. These scare tactics regrettably often have the eVect of frightening a supply tied leaseholder into not seeking third party referral as a result of the threat of an horrendous cost burden. 2.3 The situation is further exacerbated by the arbitrators appointed by the RICS, a large number of whom are Centrally London based, whose fees regularly exceed £300 an hour plus VAT. Thus for a very simple investigative progress prior to the actual event of arbitration submissions, could involve preliminary Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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meetings with the arbitrator and preliminary issues that could easily utilise 10 hours of the arbitrator’s chargeable time. Thus even before the arbitration eVectively starts into a serious mode, over £3,000 of fees have been expended. 2.4 To my personal knowledge, fear tactics are regularly used on a cost basis by BRMs/BDMs to dissuade supply tied licensees to even consider the standard legal remedy that is open to them, ie third party referral. I conclude that the above has a direct link to 1.2 above.

3. Structural Alterations 3.1 A significant influence within the profits test valuation methodology for rent review purposes, is the consideration of structural alterations undertaken by the tenant at the tenant’s expense with landlord’s authorisation. Pubcos are singularly lax in explaining the definitive regulations that exist in respect of the establishment of evidence of structural alterations with landlord’s consent. Although the situation may exist that the scheme of works is discussed with various levels of authority in the Pubco, that a planning application has been approved and that even the building surveyors of the Pubco have inspected and authorized the works themselves by verbal consent, I have never had a situation where the Pubco has explained in simple terms that a formal Licence of Alteration is actually required to stabilize the presence of the works concerned. Numerous examples exist of this situation which include the following sample premises: — The Charcoal Burner, Sidcup—Scottish & Newcastle; — The Filly Inn, Lymington—Punch Taverns; — The George, Braunton—Enterprise Inns; — The Rose & Crown, Dartford—Wellington Pub Co.; — The Portobello Gold, Notting Hill—Enterprise Inns/Unique Pub Co.; and — The Six Bells, Kidlington—Punch Taverns. 3.2 The eVect of not having a formal Licence of Alteration initially is dismissed by the Pubco rent review representative as evidence that the structural works should be included in the rent review. In every instance as outlined above, I have ensured that a retrospective Licence of Alteration has been applied for which has been, sometimes with great reluctance, easily approved. 3.3 This is a further example of a complete lack of transparency and lack of good estate management which with the ignorance of the supply tied lessee, sometimes leads to an increased rent that under the rules of rent review and the disregards in the rent review clause of the lease, should not occur. I conclude that the basic principles of good Estate Management are not being followed which has an eVect on the “Transparency” aspect of the TISC recommendations—see 1.3 above.

4. Conclusion 4.1 As a result of the information set out above, I have to conclude that the voluntary recommendations of the TISC as issued in 2004 have been completely ignored by the Pubco operators, thereby ensuring the maximization of their rental income to the benefit of shareholders, institutional investors and debt funding. 22 September 2008

Supplementary evidence submitted by David Morgan Following the giving of evidence on 18 November, I regret that I overlooked a small but essential point in respect of transparency that was raised by Martin Willis for and on behalf of the RICS. Martin Willis stated that a small number of local pub comparables might give rise to a distortion in market evidence. Having had the opportunity of reflecting on this point, I find that it is exactly the same observation that is consistently made by Pubco representatives who also stand against a comprehensive register of public house rents to ensure that Lessees are kept in the dark as to other rent settlements. However, the exact opposite holds true for the Valuation OYce of the Inland Revenue who hold and certainly utilise, a comprehensive national database of pub rents. They also have information in respect of sales/turnover which of course would be confidential in the open market as a result of the data protection laws. However, it is the very existence of this national database of pub rents that enables them to accurately set Rateable Values nationwide, often by local comparison with, say only three or four pubs and not having any knowledge of “discrepancies” between outlets. In the situation of arbitration, the opportunity is available to the tenant to seek disclosure of information that is within the freeholder’s hands and not revealed. I have often sought the complete disclosure of pubs, say within an entire city and have been refused on the grounds of “a fishing trip”. What has then resulted Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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under an Order for Disclosure is that Enterprise Inns/Punch, etc only reveal a maximum of three to six outlets stating that the information should be suYcient for comparison purposes. I think you will appreciate the anomaly! I would be grateful if you could bring this information to the attention of Peter LuV, the Chairman of the BEC and Lindsey Hoyle as it seems that Martin Willis for Fleurets could be alleged to be exactly following the thinking of his major Pubco clients which in turn, might lead to allegations that the RICS is being similarly led. December 2008

Further supplementary evidence submitted by David Morgan I accept that you have had a multitude of further representations since the BEC hearing in early December when you interviewed the Chiefs of Enterprise Inns and Punch. A specific item of disingenuous evidence has now reared itself in a number of situations nationwide through clients of this company, Cooksey DMP. The issue is that of insurance and Question 297 that was raised by your good self. Mr Tuppen’s response was: “If any licensee can demonstrate that he can get the same cover at a cheaper price, we give him his money back so we could not make a greater commitment than that”. The reality is that clients of this Firm have sought advice from their independent insurance brokers who, after expressing incredulity at both the size of the premium and the excess (always £1,000 minimum), they said that they could only consider the position if they had sight of the existing Enterprise Inns insurance policy and thus directly give a competitive quotation. Herein lies the problem. Enterprise Inns flatly refuse and have refused in every instance of which I am aware, to issue a copy of their insurance policy. We thus have the ultimate Catch 22 which shows the strength of honesty of Mr Tuppen’s reply to your Question 297. As far as I am aware, no tenant has been able to obtain a competitive quote, specifically because they are unable to obtain a copy of the Enterprise Inns insurance policy. I do accept that the Committee has now virtually concluded its detailed Report, although I did feel that this item was of such importance that you may care to consider it further before the issuance of the final Report. 19 January 2009

Memorandum submitted by the Progressive Pub Company (PPCL) PPCL is a small pub owning company based in Huddersfield, West Yorks. We purchase pubs within two hours drive of our base, principally in the conurbations of the North West. The majority of our estate is wet led community pubs. All our pubs are let to self employed tenants. We impose a limited tie on draught beer and cider and take no money from the machines

Summary of Points Made — The tie is beneficial to both sides. — Unilateral alteration of the fundamentals will have unexpected deleterious consequences. — Increased regulation will not improve the workings of the pub letting market. I am aware the Committee has all the evidence from the previous enquiry and therefore apologise if I restate things already covered but I feel it necessary to put some markers down as to how we have arrived at the current situation, these are: — The pub industry is probably undergoing its worst recession since the Second World War. — Since the tied estate beer orders the majority of pubs are now owned by stand alone pubcos rather than vertically integrated pub owning breweries. — Over the last 10 to 15 years there has been a massive increase in pub capacity with 10s of 1,000s of square feet of pubs being added, principally in town centres, each one of which is equivalent to five to 10 ordinary community locals. — There has been a huge shift in drinking habits from controlled “on sales” to home consumption of “oV sales”, this driven by an ever widening gap between the retail price “on” as against “oV”, and also by a social demographic shift away from heavy male dominated industry where leisure was principally football and pub to a far more diverse situation now. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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— Government has recently adopted two measures which are highly damaging to the “on” trade: The smoking ban has had a huge eVect on alcohol sales in pubs; the deliberately high duty increase has disproportionately aVected the pub trade. — The vast majority of pubs are not capable of introducing food profitably. Against this background the important thing is to ensure that no inadvertent harm is done to the industry by drawing false conclusions. Firstly can I address the contention that it is the pubco model that is principally to blame for the current crisis; this is demonstrably not so. Many of these companies are formed out of the tenanted divisions of older breweries. Their operational staV in many cases are from that background, the agreements they operate are based on brewery style ones from before the Tied Estates Beer Order (TEBO), Brewery tied tenants are not noticeably better oV than pubco ones (indeed given the further restrictions on what they can stock they may well be in a worse position) The dynamics of the arrangement are such that it is in the pub owning companies interests (probably more so if it is a pubco than a brewery) to ensure the viability of their customers. Breweries were little if any better thought of than pubcos (hence the TEBO). There have been suggestions of limiting the number of pubs a pubco can own. This strange way of thinking that size is a determinant of quality and big is bad, whilst quite seductive in many ways, we know personally is not always true and where there is a need for substantial backup for struggling businesses clearly the reverse is true. In any case how do you determine what figure is good and what bad, it would be completely arbitrary and would have unintended consequences (witness the TEBO). Why then do pubcos have such a poor reputation? There is undoubtedly a way in which we all blame the nearest target for our ills. The crunch brought about by the rising supply of pub space the steady decline in demand, suddenly accelerated by government action, coupled to a economic slowdown has undoubtedly produced a crisis in the industry. Have the pubcos contributed to this? In as much as there is another entity sharing the economic risk of operating the business they are undoubtedly shouldering part of the burden: The principle asset of a freehouse is the capital value of the property. This has taken a huge knock in the last 12 months, leaving anyone in a freehold freehouse many tens of thousands of pounds worse oV. If they are in the lucky position of having low borrowings they can probably survive. Though as they are much more dependent on “wet” profit, as they make much more on a barrel than a tenant, it may be the case that many are barely surviving. With the credit crunch they will be unlikely to borrow their way out of trouble against the reduced capital value, evidence for this can been seen in the increased number of freehouses up for sale or shut for conversion. Why then the uproar against pubcos? It is certainly the case that over the last five or six years there has been a considerable concentration in the pubco market. Most now adopt similar tied policies and similar management techniques with their customers. I would contend that the problem with them is largely due to their ineYciency not with the basic model. Take the tie; for beer and cider the pubcos are much more capable of extracting discounts from producers than individuals are, so by using their buying power the pub as a unit is more profitable, they create value. Removal of the tie on beer and cider would destroy value in the pub and transfer it to the producer. How much of this increased profit if any should accrue to the tenant is a moot point which I will return to. Where the tie is extended to wines and spirits these large companies can hardly buy bottles at the prices supermarkets retail at, add on the necessity to deliver it and administration and the net result is an overall diminution in the profit of the pub, thereby destroying value. The tie on machines in the way it is presented (a share of profit after rent) is also beneficial; maximising income is a statistical exercise which an individual cannot do. Unfortunately the practice of inflating the rent to the benefit of the pub owner has gone from an administrative charge to cover their fixed overhead, to now a major source of income, and neatly demonstrates the disincentivising eVect of swapping a variable cost (part share) for a fixed one (rent). If the current malaise is part due to government legislation; part due to economic circumstances largely beyond the control of either government, tenants or pub owners; and partly due to ineYciencies in the pubcos: to attempt to cure those ills by focusing on only one part of the problem is very unlikely to produce a cure, indeed given the track record so far intervention in this market is likely to produce unintended results. I would certainly predict that any change in the regulatory framework is most likely to accelerate the rate of pub closure. Of particular concern would be the removal of the tie. If the pub owner can no longer directly benefit from any increased trade the pub may generate from improved performance, as the rent will have already been set, there is a huge disincentive to them to invest any further resources into the building. This will leave anyone on a free of tie lease essentially to their own resources, the community of interest between landlord and tenant is broken and the situation many licensees castigate their landlords for adopting will be forced upon them namely they will solely be interested in collecting the rent, not in ensuring the long term welfare of the business. Any opportunity to realise the capital value for alternative uses will be taken, as there is no prospect for enhanced income from the property as a pub. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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There are suggestions that if the tie is removed rents will not raise by the same value as the discounts the tenant receives from a wholesaler as the current formula for deciding rents (50% of net profit before rent) would only allow a raise of 50% of the tenants increase in profit. Leaving aside the iniquity and possible illegality of the government depriving a business of its legally acquired profit; this whole system is predicated on the landlords having a clear knowledge of; not only how much that individual pub is doing but also of how much similar pubs are capable of. This whole structure breaks down without the tie, and eventually pubs would have to be let in a similar manner to other commercial property, generally speaking on comparable rents. There would be no assessment of sustainability.For evidence of what the likely outcome would be we need to look at the only substantial body of pubs let on such commercial leases, which are in town centres, predominantly to managed house operators. These are also largely comprised of the companies responsible for the huge rise in capacity I mentioned earlier. These companies run the largest units, in centre of the city centre circuit trade, they have very large turnovers and command top discounts from suppliers, particularly as their venues are seen as opinion formers for brand consumption. Surprisingly a number of these are in severe financial trouble and several have gone to the wall. The commonest reason being the unsustainable nature of the many of the rents they face and the unwillingness of their landlords to negotiate. These are generally speaking the most at risk pub operators, and their experience of free of tie leasing is not encouraging. There are of course individual cases of free of tie lease being highly beneficial to the tenant, but these are usually special cases of non-commercial landlords, or where there may be special circumstances. Generally speaking these pubs are in extremely poor state of physical repair as neither the landlord or the tenant has an incentive to look after the building. Having demonstrated that the tie is beneficial to both parties, there is then the question of the pricing of the tied products. Pubcos are charged with grossly overcharging their tenants, and it is undoubtedly the case that they could purchase the products much more cheaply elsewhere. However is it really in the tenant’s interest to swop produce profit for rent. I would suggest it clearly is not. The cost of products is the only truly variable input into a pub and to decrease it in favour of fixed overhead such as rent is to court disaster, particularly in a declining market. Making themselves ever more reliant on a diminishing market is bound to come unstuck eventually, even if consumption returned it still would not be sensible, as trade is never consistent and high fixed overheads play havoc with cash flow. How then are current prices arrived at? Quite extraordinarily they are determined by the brewers. They announce the wholesale prices and when they are going to increase. Do they do so in collusion with the pubcos? I do not know. I presume to do so would be illegal. It is however a very strange way of pricing. When they announce the increase they cannot pass it onto all their customers. The big pubcos just like the big supermarkets have annual pricing contracts with the brewers and so they do not suVer the increase straight away. Many of the pubcos have contracts with their tenants that oblige them to pass such increases on directly, so the pubco pockets the rise. It is very hard to tell who is paying for these increases but they certainly fall hardest on the smallest customers, just the people many tenants are asking you to turn them into. Should pubcos discount the beer to their customers? Given that very few people actual pay a brewer their wholesale price there is a fair case for suggesting a realistic price is lower than full wholesale but how much lower can only be left to the commercial judgment of the company involved. I have to say I have found it strange that the biggest two pubcos oVered the worst discounts until recently, when they could have been using their size to give their customers an edge in the market place, but the eVects of that sort of poor decision making are clear to see in their share price. This last point clearly shows that the most eVective method of regulation is the market place. Investors will punish poor performance; if the current arrangements are detrimental to the industry then they will disappear as companies that use diVerent ones prosper at the expense of the current incumbents. Or more likely those current incumbents alter their business practices to bring about a more optimal position. One thing I am pretty sure of is that, that will not involve removing the tie from beer and cider, and another thing is that it would be disastrous for the industry if it did. Turning to the more specific issues the committee are considering namely the eVect of the new licensing arrangements and of the last TISC report. Commercially I have not found the new licensing arrangements have made any great diVerence. The freedoms allowed have not led to any great alteration in drinking patterns, local councils can, as always, vary in their interpretation of rules, but as one of the objectives was to allow more local input into licensing decisions, then variety was seen as positive good. There is always a potential conflict between a pub and the population surrounding it, as by there very nature they encourage people to enjoy themselves at times when others are wishing to be quiet, particularly if they do not wish to use the pub. So far I have not encountered any unreasonable requests and the situation is not noticeably diVerent from the magistrates system. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Administratively it is both better and worse. The system for changing the licensee is much better. The system for becoming a licensee is more diYcult, and does lead to a certain inflexibility of operation. The process for changing licensing conditions is very time consuming and prohibits flexibility to changing circumstances. The last TISC report did not directly aVect our company,bit I am concerned that too rigid implementation of its recommendations would be detrimental. Banning machine income sharing (though I do not take a share myself) would I believe once again work to the detriment of the trade, by depriving the overall pub unit of profit, the practice of increasing machine rents to enhance pubco profits could well do with some light shedding on it, but this was not a point the committee originally investigated. It could be recommended that any such pubco machine rent should be clearly stated. Full disclosure of relevant information including how rents are calculated will definitely benefit the current major pubcos. I am sure they will all provide you with copious documentary evidence that that is exactly what they do. Indeed this sort of tick box culture serving central oYce needs is another of the traits that diVerentiate the current incumbents from their predecessors and has not in my experience led to either improved corporate performance or customer relations. For small operators such as us it will be yet another regulatory burden we could do without.

Memorandum submitted by Justice for Licensees In January 2007 Justice for Licensees was formed and currently has approximately 1,000 members. We formed as a group after a few of us realised that we were not alone in the perception of how pub companies operated. Over the past year or so we have heard of many tales of woe from the tenants of the major Pubcos. Historically Brewers acted in a paternalistic manner which was to the best interests of both the brewer, the tenant and the consumer. As time went by they changed and their monopoly was used against tenants. From 1989 when the Beer Orders were formed to adjust the brewers monopolistic control Pubcos emerged. As time has gone by their growth fuelled by easy money has allowed them to pay high prices and also grow substantially in size. The expression power corrupts and absolute power corrupts absolutely perfectly describes Pubcos in their current form. Their sole interest is apply heady levels of rent, charge the highest supply prices possible and extract little extras, which amount to millions, by taking royalties and listing fees from suppliers as well as an extra slice of the awp takings which they all ignore when it comes to assessing rent. It is JFL’s opinion that there is a much more serious situation now than there was in 1989. Many of the benefits for tenants that were introduced during the Beer Orders now no longer exist and it is a fact that many tenants are now more tied than they were in 1989. We have spoken to trade groups, Pubcos, shareholders and tenants to see if there is a common goal that we can work towards but our discussions reveal intransigence on the part of the Pubcos. They just want money to service their debt, pay their shareholder dividends and increase the share price. Tenants and consumers come a long way down the list of interest. There are two very important bodies which Pubcos appear to have infiltrated and use to their own interest. They are the BBPA and RICS. The BBPA relative to the discounts that they extract, and RICS regarding the levels of rent, their control of arbitrations, valuers and independent experts. The British Beer and Pub Association purports to represent the trade and yet the majority of its members are brewers and Pubcos. Taken from the BBPA website Our members account for 98% of beer brewed in the UK and own more than half of Britain’s 58,000 pubs. Chairman: Michael Turner (Fuller Smith & Turner plc) Vice Chairman: Ralph Findlay (Marstons plc) Vice Chairman: Mark Hunter (Coors Brewers Ltd) Chief Executive: Robert Hayward OBE

Executive Groups There are three Executive Groups as follows: — Brand Owners & Brewers Group (Chairman—Jonathan Neame—Shepherd Neame Ltd); — Pub & Leisure Group (Chairman—Ralph Findlay—Marstons plc); and — Communications Group (Chairman—Simon Townsend—Enterprise Inns plc). The former Chairman and the Vice President is one Mr Graham Edward Tuppen, the CEO of Enterprise Inns. Mr Tuppen was quoted in the press stating that he thought that the MP’s who were looking to have the Pubcos re-investigated were moronic. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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While the BBPA holds itself out to represent the retail trade they in fact only represent less than 10,000 retail operations relating to managed houses and members of AMLR. Their stance in claiming to represent the retail trade is totally and absolutely dishonest. It is recognised that nearly 30,000 pubs are owned by Brewers and Pubcos but that is in the capacity as property companies which lease out the properties to retailers, often with a supply tie. They do not and cannot act in a retail capacity for those leased properties. The BBPA neither represents the tenants or the opinions of the tenants. Evidence supplied by the BBPA will only reflect the opinions of the Pubcos and brewers We are also of the view that the Pubcos, in their desire to increase their earnings, apply pressure through the BBPA to obtain more discounts oV the wholesale price. It does not take a genius to recognise that for the Pubcos to extract an extra discount of £30–£50 a barrel over the last four years it has to come from somewhere. The brewers were not making so much that they could give that kind of money away. Looking at how the wholesale prices have increased it would seem clear that as the Pubco asks for more the Brewer puts up their prices to cover the discounts. This is not new. The small brewers admitted to the T&ISC that they put their prices up so that the Pubco could get a bigger discount.43 It has been happening to the bigger boys as well. The T&ISC stated that the BBPA should review its code in the light of their recommendations. They ignored virtually everyone, except to a small degree on UORR. They agreed that rent could go down but then said that it could not fall below the floor level of the lease. In other words there was a limit to how much it could fall. Even worse they refused to accept that the annual increase in rent based on RPI were upward only. Since when did RPI ever come down? Never! So the new Code was just deception. In a nutshell BBPA have overseen price fixing of produce, to the detriment of tenants and consumers, destruction of the T&ISC recommendations and misrepresentation of their persona. The other prime issue is the rental basis. The T&ISC in Para 158 stated that all tenants should be treated fairly and rents should be reasonable and sustainable. The amount of tenants who feel that they have been treated unfairly and /or their rents are not reasonable or sustainable has astounded JFL. This has not been secluded to one particular area but is apparent across the whole of Britain. It is known that the T&ISC issued recommendations regarding the construction of profit assessment and rental construction. The T&ISC said 144. The industry could and should establish clear guidelines for the valuation process. Where they do not already exist, new national guidance for rent calculation should be compiled, and disclosure rules clarified. The profit assessment method of calculating rent should be carried out in accordance with national accounting standards and with knowledge, prudence and due diligence. 145. Pubcos should provide their tenants with a comprehensive breakdown of how their rent was calculated. This should reveal the whole detail of the profit assessment and how the specific requirements of the lease conditions had been interpreted by valuers. The profit assessment should form an addendum to leases, with any subsequent review, to ensure transparency. We have already identified that the BBPA would not endorse these two recommendations. But what about RICS? JFL has learnt that how the rents are set for the tenanted sector is covered by the VIP2 paper. This was drafted by Mr Luay Al-Khatib, an associate director of the Royal Institute of Chartered Surveyors, and the Chairman of the TRVG Committee, Mr Robert May. Mr May was introduced to ourselves as the Rent Controller for Enterprise Inns plc. The rents are set not only on the premise that the tenant should be an eYcient operator but also that the tenant should be capable of turning back the tide on national and regional decline. As for International Accounting Standards they just do not accept that this standard is required. The view has been given that RICS assumed that the prospective tenant would have a reasonable amount of training and experience but that is not reality. Most of the Pubco training is given after signing the lease.

With reference to Mr Robert May, who is employed by Enterprise Inns. We believe that in Mr May co- drafting the VIP 2 paper there would not only have been a huge conflict of interest but also there would have been a vested interest on Mr May’s part, it is in his employers interest to ensure that the highest return possible is achieved. It was in Mr May’s interest to ensure that his employers were happy with the outcome of the paper. The T&ISC was adamant that the tied tenant should not be worse oV than if they were free of tie. This concurred not only with the EU but the Appeal Court. In addition it gave clear guidelines, see 144 and 145 above, how transparency could be achieved. RICS under the guidance of Robert May could not possibly accept those standards since it would be contrary to their personal objectives, the instructions given to the

43 See T&ISC report paragraph 51 and 52. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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valuers and thereby arbitrators. Observance of the T&ISC recommendations would cost the Pubcos dearly and could have serious repercussions for those who were proven to have been deceitful. There could be enormous claims for malpractice. Many tenants are suVering due to the un-sustainability and the complexities of the current rental system but the Pubcos achieving their comfortable profits at the expense of the tenants and consumers. RICS have been shown to have been infiltrated, their standards diminished, and since they do not believe in transparency when it comes to assessing the rent of tied premises they must be seen to be totally untrustworthy. These are two prime issues, the tie and the rents. Neither the Pubcos or RICS can be trusted to adjust rents to ensure that the tied tenant is not worse oV than if they were free of tie or that the tenant[s] should have a liveable income. They either do the sums correctly or remove the tie. They cannot be trusted, so remove the tie. Addressing the actual calculation of rent, RICS have made it clear that they do not accept that there should be whole detail or that the profit assessment should observe National Accounting Principle. They may not like it but it is a case that they must do so under statute or it should be taken away from them. RICS require a shake up. Their President cannot stay in his ivory tower while his minions are raping our industry, our pubs and our livelihoods. The BESC should make sure that they are brought to heel!

We have carried out further research and listened to our members relative to the un-sustainability of the rents and the price of the tie. The eVects of these two areas are pivotal in the “swinging door” analogy of the tenanted sector. The following records some of our research: (i) The Pubcos have refused to release the figures for surrenders or forfeiture of leases, we feel that this is due to the amount of tenants that are surrendering their leases, going bankrupt or taken to court by their pubco for forfeiture of lease. We believe that if these figures were released it would damage the Pubcos stance that there is nothing wrong with their model or their estates. (ii) JFL is fully aware that the Pubcos have refused to produce the prices that they pay for the products, stating that it would be detrimental to their business. We believe this to be a true statement of facts, although we do not believe in the sense as the Pubcos are intending. We believe that if the true price that they pay for a barrel was to emerge they could not possibly justify the increase and burden they place on their tenants. (iii) JFL has been advised that many Pubcos carry alleviation clauses within their contracts with the brewers. These are in place to ease any burden of price increases throughout the duration of the contract, and yet the Pubcos immediately pass on any increases to their tenants and the consumer. (iv) The Pubcos have been very vocal on the benefits of the model especially the cheapness of entry theory. Whilst in theory there may well be an initial saving in entering the trade through the tenanted market, however as is being proven on countless occasions, this is where the benefit ends as the reality is that it too often proves the most expensive route. (v) Although Para 165 discussed the benefits of training and how they would like the Pubcos to benefit from better trained tenants. The Pubcos are oVering training but always at the expense of the tenant. However JFL is aware of at least one case, a new tenant of less than a year standing who was oVered no training whatsoever. We do not believe he is a lone case. (vi) Regarding the tie it has become clear that there are diVerent variations contained in lease contracts. These vary from being tied just on dispensed lager and beer to the full on tie where tenants are tied on all pump products, packaged products, wines, minerals and spirits. Although there was supposed to be a benefit of having the tie in that there was a lower rent than the free trade sector, to compensate the reality is that tied rents appear are the same as those in the free trade sector; the benefit of the tie has been removed by the Pubcos. (vii) Many tenants are of the opinion that there is no longer any benefit to the tie. There are concerns over the cost of the tie, many tenants are fully aware that they are paying in excess of £40.00 per keg or more from the pubco than if they had the freedom to choose their supplier. Freedom from the tie would guarantee more income for the tenant and potentially better prices for the consumer. (viii) There are also concerns over the restrictions arising from the tie, such as restrictions on the deliveries, if you’re lucky two deliveries per week whereas if they were free of tie they could ensure deliveries at least five days of the week. The tenants also view that being able to place an order in the morning and receive the delivery later that day or early the next day would definitely be beneficial and this is something denied to them as a consequence of the tie. We at JFL consider that Pubcos, BBPA and RICS have collectively abused the system, and tenants, and in many cases mainly for their own gain. That is unacceptable! The T&ISC made recommendations four years ago and if they had been applied it would have brought transparency and fairness into the tenant system. Those recommendations have been subverted, sidelined or ignored. Had the recommendations been implemented we believe that virtually all parties would have benefited. We have found that the most dissent Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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has come from the tenants of Punch Taverns and Enterprise Inns with Admiral and SNPE. These Pubcos have proven not to care for either their licensees or their pubs and are driven solely by profits, at the expense of all others. It is too late for the Pubcos to now adopt the T&ISC recommendations the damage to the industry and tenants has been done The Government have to step in and stop the abuse of the position of power and strength that the Pubcos hold. We of JFL require the BESC to recommend to the Government the removal of the tie and paragraphs 144 and 145 of the T&ISC recommendations mandatory together with the full and total removal of upward only rent reviews and the pernicious annual indexation of rent.

Memorandum submitted by the Society of Independent Brewers

1. Summary and Proposed Remedy 1.1 The 2004 T&ISC inquiry found that the ability of public houses to oVer a broader range of products is important in the interests of extending consumer choice, and in the absence of the legislative option, recommended that pubcos allow their tenants more flexibility in the choice of products they sell. 1.2 Since 2004 there has been a strong increase in general consumer demand for local produce. The number of local or small breweries has greatly increased to enable this demand to be met. 1.3 Small brewers are overwhelmingly dedicated to cask conditioned ale which is uniquely brewed for on- trade consumption. 1.4 The benefits of a wider availability of craft beers from small brewers are increased market competition resulting from wider consumer choice of quality, innovative products and general improved business performance for relevant stockists. 1.5 Barriers to the availability of local beer remain, however, most notably through pubcos logistics demands. 1.6 SIBA operates a Direct Delivery Scheme (DDS) adapted to the preference for centralised logistics operated by pubcos to thus widen the availability of local beer to consumers and retailers. 1.7 Despite acclaim for DDS, growing consumer demand for local produce and the demonstrable success of local beer the availability of local beer and the acceptance of DDS by pubcos has been restricted. By the end of 2007: — only 15% of tenancies and 31% of leased pubs stocked a local brewery’s beer, compared to 56% of freehouses; and — DDS had only been embraced by 3 pubcos representing just over a quarter (26%) of the tenanted, leased and managed pub universe. 1.8 SIBA proposes that: — DDS is a proven commercial solution to improving market competitiveness, meeting consumer demand for local produce and allowing tenants more flexibility in product range while acknowledging pubcos’ logistical practices; — Pubcos should be strongly encouraged to embrace DDS with greater commitment; and — in the absence of such commitment there is no alternative but to seek a legislative solution. As cask conditioned ale is the only product available to pubs that is produced locally throughout the country the remedy is to therefore exclude cask conditioned ale from the tie.

2. Introduction 2.1 This paper details the submission by the Society of Independent Brewers (SIBA) to the Business & Enterprise Committee’s follow up inquiry into pubcos. 2.2 SIBA is a trade organisation founded in 1980 to represent the interests of the UK’s independent brewers which number approximately 650; approximately two-thirds of them are SIBA members. SIBA is consequently the UK’s most representative member based brewing organisation. 2.3 SIBA notes that in the course of the investigation “the Business and Enterprise Committee, in re- visiting this subject, is interested in whether the conclusions of their predecessor still stand and how its recommendations have been applied”.44 2.4 SIBA proposes that the conclusions and recommendations of the 2004 T&ISC pubco inquiry which are relevant to its members are as follows: 2.4.1 That small brewers may be disadvantaged by the requirements set by pubcos.45

44 Business & Enterprise Committee PN46, 25 June 2008. 45 Ibid. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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2.4.2 “. . .The ability of public houses to oVer a broader range of products, for example to satisfy demand for local products, is important in the interests of extending consumer choice. In the absence of the legislative option we would recommend that pubcos allow their tenants more flexibility in the choice of products they sell. The early adoption of such practices should aVord more opportunity for small brewers to participate in the market.” (para 61).46 2.4.3 “Pubcos’ centralised distribution facilities enable small brewers who are ‘willing and able’ to deliver to regional depots to have access to a far wider geographical market that ever before. However, we are concerned that alternative beer distribution arrangements for those small brewers which are not ‘willing’ or ‘able’ are dwindling, with the [then] recent acquisition of Beer Seller by one of the big three centralised logistics companies, Scottish Courage. For those small brewers for whom barriers still exist, [the] Society of Independent Brewers’ Direct Delivery Scheme’ suggests one possible way forward, especially if operated on a regional basis.” (para 66).47

3. The Small Brewing Industry

3.1 While brewing membership of SIBA is open to all breweries the vast majority of SIBA’s full brewing members are small brewers classified by HM Revenue & Customs as either micro brewers (output of less than 5,000 HL pa) or local brewers (output of between 5,000HL and 30,000HL pa) 3.2 The 2004 T&ISC inquiry reported that pubco operating practices are responsible for market barriers to the participation and development of small brewers, most notably: — the onus of proving market demand for local beer; — the ability to fulfil potential orders from pubcos; — the agreement to supply at the price demanded by the pubco; and — the ability of brewers to comply with the logistics demands of the pubco. 3.3 SIBA operates a Direct Delivery Scheme (DDS) adapted to the preference for centralised logistics operated by pubcos to thus widen the availability of local beer to consumers and retailers. The scheme enables multiple retailers to trade more simply with local brewers while maintaining the administrative and logistical simplicity of dealing with a single contact point. An internet-based administration system developed by SIBA eVectively provides multiple retailers a portal to a wide choice of suppliers without a need to contact them. Order placement, billing and payment is centralised so that the retailer deals with a single contact point operated by SIBA DDS who then have responsibility for communication with local brewers. This similarly enables local brewers to sell and deliver directly into the local outlet of a multiple retailer without the need for the brewer’s communication with the multiple’s head oYce. 3.4 The benefits of a wider availability of craft beers from small brewers are increased market competition resulting from wider consumer choice of quality, innovative products and general improved business performance for relevant stockists. 3.4.1 The quality and consumer appreciation of micro and local brewers’ beers can be demonstrated by SIBA members’ overwhelming success in industry awards.48 3.4.2 Small brewers are highly innovative and responsible, for example, for the introduction of new beer types such as golden ales and catering to niche markets such as diet intolerance through the first British- brewed gluten-free beers. 3.4.3 In a 2006 survey of 200 pubco-owned pubs SIBA found a very positive trade response to its Direct Delivery Scheme among existing stockists, the majority of whom judged that it had contributed to growing not just beer sales but total pub business with the most common reasons mentioned being a greater choice and availability of local ales. 3.4.4 The benefits of trading with small brewers are thus consistent with the general benefits of trading with small and medium sized enterprises including: greater competition reducing costs from all suppliers; ability to tailor products to meet customer needs; innovation through exploitation of new technology or providing products in new or underdeveloped markets (source: Small Business Service).49

46 House of Commons Trade & Industry Committee Pub Companies, 2nd report of session 2004–05. 47 House of Commons Trade & Industry Committee Pub Companies, 2nd report of session 2004–05. 48 CAMRA 2008 was won by a SIBA member for the 8th consecutive year; in the CAMRA 2007 Champion Beer of Britain SIBA members won gold in all seven categories; in the International Beer Challenge 2007 SIBA members won five of the 12 categories in this competition open to breweries from around the world and in the Tesco Drinks Awards 2007 SIBA members were the only British winners in the categories. 49 Small But Making Big Leaps, The Grocer, 15 July 2006. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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4. Progress made since 2004 4.1 Local breweries have grown output typically by 10% p.a. since 2004, partly on the back of continued growing demand for local food and drink, usually defined as food and drink that has been produced and marketed within a 30 mile radius. Local beer is one of the few growth areas of the British beer market and local breweries can thus demonstrate the ability of consumer demand for local beer to grow sales for appropriate retailers if allowed the opportunity to stock it. 4.2 This growth has, however, been from a low base and small brewers are still estimated to only comprise 1.6% of the beer market which remains dominated by large brewers. The only remaining British brewer was recently acquired by a multi-national and the largest regional breweries have continued an acquisition programme which has ensured their re-classification as super-regionals. 4.3 The eVectiveness & eYciency of DDS was recognised in the BBC 2007 Food & Farming Awards where it won the “Best National or Regional Retailer Initiative” category. 4.4 DDS has been actively marketed to pubcos through advertising in trade press, direct marketing and selling eVorts, press coverage and a significant trade show presence since the 2004 inquiry. 4.5 There have been improvements in the incidence of small breweries trading with pubcos, due in large part to the growth of beers supplied through DDS, but the availability of local beer is still greatly restricted: 4.5.1 In SIBA’s 2007 member survey: — two out of every 10 small breweries did not trade with a single pubco; — more than half (55%) of local breweries did not count a pub-owning brewer among their customer base; — local brewers lose on average 6-8 customers each year to their acquisition by a multiple pub operator; — four out of five local brewers did not deal with any of the big three outsourced logistics operators; and — one in three local brewers had lost a customer because of trading diYculties with these big logistics companies. 4.5.2 Despite the success of DDS among a few customers, national recognition of its eYcacy and heavyweight marketing activity, by the end of 2007 DDS had only been embraced by three pubcos representing just over a quarter (26%) of the tenanted, leased and managed pub universe.50 Furthermore, nearly 70% of the value sales of local beer to the on-trade through DDS are to a single customer. 4.5.3 The consequent restricted availability of local beer is further underlined by recent pub trade press surveys: 4.5.3.1 Of the 650 pubs surveyed by The Publican51 only 15% of tenancies and 31% of leased pubs stocked a local brewery’s beer, compared to 56% of freehouses. 9% of pubs were using DDS. 4.5.3.2 Two-thirds of licensees are aware of the demand for local beer but just over a third have yet to oVer it to their customers.52 September 2008

Memorandum submitted by Camelot Inns We are a multiple PubCo running seven units in, mainly, the Hertfordshire area. We have been in business for 15 years and employ approximately 50 people across a variety of Public Houses. I am writing to raise awareness of issues arising from our trading arrangements with a number of the major Pub Companies, namely in direct dealings with Enterprise Inns, Punch Pubs and Admiral Taverns. I am sure you will receive a number of submissions concerning the blatant unfairness of High rents and High ‘tied’ beer prices, a process that has been abused by the Pub Companies before and after last Select Committee enquiry in 2004 and continues to be the major cause of the demise of a great British attraction— The Traditional Pub. I wish, however, to concentrate on one of the strongest recommendations of the TISC inquiry, namely that the nominated tie of gaming and amusement machines should be ceased immediately. The pubco retailers took no notice of this recommendation and continue to not only approve and nominate suppliers of their choice but also to receive from those suppliers the payment of substantial royalties and/or a share of the income derived from machines as a prerequisite of acceptance of those suppliers gaining admission to their estates.

50 AC Nielsen, The UK Drinks Market 2007. 51 The Publican Beer Report, November 2007. 52 Ibid. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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The above royalties paid to the pubcos are concealed within the machine rentals charged by the supplier so in very many cases the unwitting tenant is unaware of how much income is derived and paid over to the pubco from the income of their machines. I consider that this prevailing situation is an anti-competitive, iniquitous, baronial and feudal practice. Tenants sign their lease in the knowledge of the supply clause but through force majeure of the large pubco retailers holding so many thousands of pubs throughout the UK, what real choice do they have if they wish to run their own business as tenants of a pub? The pubco “retail agreements” or Leases as they should be known, are, as far as I am aware, the only landlords and tenants lease agreements in existence that tie in the supply of non-core products, ie gaming and amusement machines. It is important to note that these Agreements are not franchises—they are the basis for self employed business people to have the freedom to run a Pub business. The might and strength of the predominant pubco retailers has, however,set this unreasonable practice—and other “hidden ties” as the norm. I believe it is essential in the interests of free competitive supply, freedom of choice for the tenant, and, ultimately benefit to the consumer who is the client base of the pub that the above practice exercised by the pubco retailers is ceased. I am enclosing some figures using actual numbers from our mix of “Free” and “Tied” Pubs to show the impact on a Pubco retailer of these “hidden rents”.

Pubco Machine Share Arrangements The Pubcos claim to oVer ‘machine management services’ and tie their tenants into a list of “nominated suppliers”. To be a nominated supplier you have to agree to pay a royalty,per machine, upfront to the Pubco. This royalty is added to the machine rents and deducted before the tenant/lessee receives his share. The royalty payment varies from Pubco to Pubco and indeed from machine type. There is no transparency here—but a typical royalty would be £30 per AWP (fruit machine) per week. Multiply this by the thousands of AWPs in the Pubco estates and there is a massive “hidden” payment involved. The Pubcos say this is 50/50 share agreement. There follows an example from one of our Public Houses. Pub “A” with three Fruit Machines and a Pool Table. Weekly Collection

Tenant Dealing Direct Machines Supplied via Pub with Gaming Supplier Co “nominated” Supplier List Gross Cash in Box 717.40 717.40 Less Rent 183.00 275.00 Nett Cash after Rent 534.40 442.40 Tenant Lessee 534.40 221.20 Pubco Share 221.20 Pubco Royalty 92.00

Totals per annum; Based on this one unit. Tenant “free” of Pubco tie receives £27,780. Tenant “tied” to nominated list receives £11,500. Pubco total from share/royalty £16,280.

Memorandum submitted by The Swan Inn The Swan benefits from a summer period that boosts the taking for the pub for six months of the year. The remaining six months it treads water waiting for the bumper months to arrive. Last summer and for most of this year our weather has been poor and this aVects the number of visitors we attract to our village. Within the village there are three other venues all adding up to a total of 250 restaurant covers per night. Good summer weather brings this in easily but with the poor weather of late this becomes an unattainable number. Weather is only one of the factors here, I believe that cheap beer from supermarkets combined with the smoking ban and credit crunch have all resulted in poor trading figures for the Swan. In January 2007 accountants at Punch discovered that an invoice from August ’06 had not been billed to the pub. We did not notice it at our end and I gather that we were one of a number of pubs who found this bill being added onto its winter trade bills which are considerably lower that the August totals. At this time my rent was £750 a week plus whatever beer I was buying, so roughly in a winter’s fortnight Punch would extract from my account the relevant rent and beer bills. Usually in the region of £3–4K. On the discovery of the missed invoice Punch allocated this resulting in the usual payment being increased by £2,650. We failed Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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to meet this and were placed onto a cash account which simply means if we have no cash then we have no delivery. The missing invoice was split between a 26-week period and added to the rent we owed which resulted in us paying in cash £1085.30 ! Beer every week on a Tuesday before the beer would be delivered on a Wednesday. We would occasionally find that we did not have suYcient money for the beer and rent and on these occasions they have been kind enough to deliver if we paid for the drink in advance. With a reduced winter cash flow we have at times been forced to buy beer out. Punch oVers an emergency next day delivery on the condition that you pay for it on the same day with a delivery window of 6.00 am to 6.00 pm. If you have more than two such deliveries in a quarter you are charged £40 a delivery. Normal deliveries and the first two extra are free. Punch has NO delivery system for a weekend delivery. Although the BDM has said if I call he will see what he can do to get some to us. With restricted cash flow we have on occasions had to buy beer out in order to meet the demand. The price diVerential between beer purchased through our business partner, Punch and prices from wholesalers is roughly about £40 a barrel in Punch’s favor. This places the need for Punch-owned pubs to maintain artificial prices on tied products in order to meet the GP’s as laid down by Punch in rent reviews and the discussions. This places us at a disadvantage when comparing us to our neighboring venues who buy the same products for about £40 less a barrel.

Product Punch Price Bookers Price DiVerence Price per Pint Stella £124.59 £86.99 £37.60 .47p/Pint Carlsberg £115.40 £73.99 £41.41 .47p/Pint

I was recently visited by Brulines the Police agency for beer who placed an “on the spot fine” of £618 for beer that I had in the past bought from cheaper suppliers because I had run out on a Friday with the full weekend ahead. I questioned this with my Punch BDM and was informed that it was my own fault as I had the opportunity to buy the beer. My cash flow and the way I choose to run my business is irrelevant. Our crippled cash flow has resulted in debts piling up and we are now looking to re-finance the pub just to get to a level ground again before the winter commences. We are currently going through a rent review. In January 2007 I provided figures and information as requested by my BDM. I now realise that this was a mistake but it was the first time I have been through a review and was naı¨ve to the process. I was presented by Punch with two sheets a current state and a Negotiation. These showed my take and projected take (FMT) on various items which once the allowable expenses had been removed resulted in a gross profit which is then divided in two to provide a figure for rent. My current rent stands at £32,286 and the new figures they had suggested was to be £37,612. With the current economic climate I knew that the business could not sustain the current rent let alone an increase. I requested detailed explanations of how these figures where reached. A document was sent to me with breakdowns of the overall GP’s for each department. I went through this and discovered glaring mathematical mistakes which lowered GP’s totals from 61% to 56% on the same figures making a diVerence of £12,000. The documents provided me with information regarding “allowable expenses” that we where allowed to subtract. For example I was allowed to spend £1,000 a year in running my car, with the current fuel costs this allowed for 18 tanks of fuel or 5,000 miles a year. The Swan is a rural pub compared to a town pub. Much of my costs were higher than Punch expected them to be which came down to the crunch when you understand that Punch imagines that two people will be running the operation. I operate this on my own so the second person’s time has to be covered by a hired hand. This can amount up to an additional £15,000 per annum in funds that are now allowable expenses. I have argued the rent review figures and we have now got to a figure of £34,000. This I still feel is too high. Punch have reworked their figures that still say I am going to do at least £70,000 more than this year and my GP’s will be high enough to produce a rent of £34,000. I have repeatedly asked for the figures not to be based on my input and to be based on average trade requesting examples of similar locations to which I am being told there have none available for me to see. Furthermore don’t feel that they need to prove their figures. I have also asked for the matter to be looked at by the charter that Punch claim to have introduced in the 2004 Select Committee on Trade and Industry Section 8 The Benefit of the Tie to Tenants, citing an “independent mediation service at no cost to the tenant” to which they scratch their heads and say that the guy they use is employed by Punch, so does not exist. We are racing towards arbitration which we can ill aVord and I feel this has now been used to highlight the fact we can ill aVord it. It is obviously cheaper for us to accept the £1,400 rise and save thousands but it feels wrong when we are placed under such tough operating conditions. Pubco’s are killing rural pubs as they get strangled every winter or bad summer to meet inflated prices and over the top rents for buildings that leak and have poor services for the customers when they do arrive. Something must be done before the rural English pub is replaced by larger subsidised properties selling less than standard products in a plastic environment. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by Paul Daly

1. Introduction I am a free of tie operator for the last five years. My bar “Zigfrid” is in Hoxton Square, London N16NU. It is a successful bar and I am able to negotiate prices based on the volume of sales. On 11 of April 2008 I bought a Unique Taverns lease (owned by Enterprise Inns Pic) at 243 Old Street, London EC1V 9EY. This bar is tied on beer and packaged products. I opened the venue now called Roadtrip at 243 Old Street after extensive refurbishment works on 29 July 2008. Now being a licensee of both tied and tie-free leases I am in a perfect position to draw comparisons between the two.

2. Rent Calculation regarding “Roadtrip”, 243 Old Street,London EC1V 9EY Enterprise Inns Plc (Unique Taverns) have a head lease with Hackney Council at £1,000 (one thousand pounds per year). They charge me £26,000 per year making a 2,500% profit (two thousand five hundred per cent). I have never made 2,500% profit on anything in my life and think Enterprise Inns Plc should be more than satisfied with this huge extortionate profit but instead it seems they are driven by greed simply because they can.

3. The Supply Tie I cannot believe this kind of extortionate middlemanship still exists in 2008. As a person who has been self employed all his working life I am amazed by a situation where one is not free to purchase products from the most competitive source to sell in your retail outlet that has cost so much money to refurbish and get right. The PubCos argue for the benefits a tied lease can oVer: “There’s clearly a lot less initial capital investment. And in tougher trading conditions tenants and lessees are more likely to be supported by a landlord than they are by a bank. Banks are calling in their lending, but clearly we have a vested interest in a pub continuing to trade successfully.” (Simon Townsend, Enterprise Inns, chief operating oYcer. The Publican, 3 September 2008). As a licensee I say it should be solely down to the operator to estimate the trading conditions and act as they see best. Currently there is no choice between a bank and a PubCo whereas this choice should and must exist. If PubCos are so confident in the benefits their middlemanship brings to the operators, they should have no arguments against this choice being granted. In reality, of course, the tied lease is actually the reason why more and more pubs and bars find it diYcult to trade successfully every day. The vague idea of being supported by a PubCo is a utopia. The dying of England’s pubculture is not down to naturally changing social habits—it is the greed of the PubCos. To demonstrate how much Enterprise Inns Plc charge over and above the prices I pay for free of tie products I have commissioned my accountant Cecile Edwards to do a like for like comparison between Unique Taverns (Enterprise Inns Pic) tied lease and my free of tie lease (attached Appendix 1). If the committee shall need proof of any invoices from Enterprise Inns Plc to prove the above figures and comparisons I shall be happy to supply them together with invoices from Coors regarding my free of tie site. My solicitor can verify the head lease rent and my rent and my accountant could appear in court if so required by yourselves.

APPENDIX 1

Road Trip

Coors vs Enterprise

Zigfrid Road Trip DISCOUNTED COORS ENTERPRISE VARIANCE VARIANCE Product Size Net Price Net Price £ % Guinness 11g £90.28 110.75 £20.47 23% Carling 11g £64.33 103.46 £39.13 61% Grolsch 11g £77.32 119.51 £42.19 55% Sol 24 £18.04 23.65 £5.61 31% Budvar 24 £15.99 24.44 £8.45 53% 330ml coke 24 £8.49 9.71 £1.22 14% Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Zigfrid Road Trip DISCOUNTED COORS ENTERPRISE VARIANCE VARIANCE Product Size Net Price Net Price £ % 330ml diet coke 24 £8.49 12.45 £3.96 47% Baby Bitter Lemon Schweppes 125ml 24 £4.98 6.05 £1.07 21% Baby Ginger Ale Can Dry 125ml 24 £4.38 6.05 £1.67 38% Baby ginger beer Schweppes 200ml 24 £6.21 7.28 £1.07 17% Baby slimline tonic Schweppes 125ml 24 £4.38 7.28 £2.90 66% Blackcurrant Cordial Schweppes 12 x 1 ltr £10.80 14.55 £3.75 35% Lime Cordial Schweppes 12 x 1 ltr £10.80 14.55 £3.75 35% £324.49 £459.73 £135.24 42% Based on exact product matches as above. Enterprise are billing ! 42% on average.

Brewery Price List Comparisons Further to your instruction, we have made a direct price comparison on products purchased at “Road Trip”—a bar you own which has a brewery tie with “Enterprise” and those which are bought at your free house “Zigfrid”. For the comparison, we have selected the main beverage supplier from “Zigfrid”, namely “Coors” to compare against “Enterprise”, the Brewery and supplier to “Road Trip”. In order to make the sampling of prices fair and in order to see the eVect of price variances which directly eVect your business, we have selected your latest order from “Coors”, and matched the products to the “Enterprise” price list. The results can be seen on the attached table, product by product, but in summary are as follows: On average “Enterprise” charges you 42% more on purchases, compared to those bought from “Coors”. The largest price list variances seen on this comparison was 66% and the lowest being 14%. Overall and based on prices being 42% higher, this will undoubtedly have a considerable eVect on your gross profit margin. If for example you take the GP margin at “Zigfrid” at say 70%, then you factor in the increased purchase prices and without increasing the sales price, your GP would only ever achieve to 57%. It must be noted, that the above percentages are based on the average higher price and average usage of all products. You must expect less of a margin as shown on the attachment for products such as “Carling” where the price is 61% higher that that of “Coors”. 29 September 2008

Supplementary memorandum from Paul Daly I awoke this morning with one of those feelings of not quite believing I was in the situation I’m in. I was thinking that in the time the British government has allowed these huge property companies to force their tenants to buy products that have been hugely inflated Apartheid has fallen, there is a ceasefire in Northern Ireland, The Soviet Union has fallen, and America has a black president. This model is a form of tyranny and the irresponsible borrowing that these companies have signed up to is forcing them to take more and more advantage of their tenants or “partners” as they like to call us. It has got to be stopped and stopped now. What they have done and the Gearing they have exposed the companies to is similar to the Sub-Prime fiasco in America. By this I mean they know perfectly well that X-per cent of their tenants will fail and face financial ruin but still they borrow. This huge debt then forces them to take more and more advantage of their “Partners”. This self imposed huge liability is going to be their main argument when they come cap in hand with grovelling stories of not being able to survive on 9 December at the oral evidence session. They need to be stopped and heads need to roll as they did and are continuing to do in the Banking sector worldwide. I would like to attend on Tuesday please to witness the lies and legal loopholes that they come up with this time to further out-manoeuvre the MPS and the Business and Enterprise Committee. What do I need to do to attend? Please add this letter into the system against this extreme exploitation being allowed to continue. 5 December 2008 Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by Eddie Cant I just want to relay what happened to me at my pub the Colliers Arms in Skewen South Wales. Last year in May 2007 my rent was due for an increase, Enterprise wanted an extra £90.00 on top of my current rent of £803 per week, I rejected this oVer as it was way over the top. Enterprise started to use bullying tactics, verbally threatening me I have no choice but to accept, I told them I was going to the arbitrator, they said I would have to pay their costs. It was only after I spoke to David Morgan of Cookies who helped me to fight the case, it went on for over a year, plenty of lost sleep, they Enterprise decided on the very last hour not to pursue the case, a spoke person went on to say to a reporter from our local paper that they felt my rent should not have gone in the first place. Now this has left me with a bill of over £3,500, I am now trying to get this money from Enterprise. In the meantime five pubs have closed around me, one has now opened with a manager put in, to my knowledge he is not paying any rent to the brewery, he is selling his beer a lot cheaper than I can, I have asked the BDM for information on this, he has refused, I have again asked him for the Same concessions as the managed pub, but I’m not holding my breath. 29 September 2008

Memorandum submitted anonymously I signed a lease with Enterprise Inns in May 2006, at a cost of £42,000. Added to this I had to give a deposit of £10,000 and pay for stock, fixtures and fittings at a cost of approximately £37,000. The rent was pre-set at £45,000 per annum. The lease is fully repairing and fully tied to Enterprise Inns for all beer, wines spirits and soft drinks. The average weekly take was £5,500. On the face of it, the information supplied to me by Enterprise at the time led me to believe that I was entering into in a good business arrangement. In December 2006 I contacted my area manager to explain that the rent and stock were proving so expensive that I couldn’t meet all of my obligations and that I needed help. At first I was told that it must be my business plan and they put one together for me. This allowed no provision for repairs or renovation, and insignificant allowance for staV. I was already working in excess of 65 hours a week at about £1.00 an hour. Close inspection showed theses figures to be grossly inaccurate in real terms. My research showed that the average Enterprise Inns pub was taking £5500 per week and paying £30,000 in rent. I argued this with Enterprise and in June they agreed to reduce the rent to £30,000 and refit the pub straight away. We flooded in July 2007 and the refit did not start until November 2007. We were finally fully open and operational from December 2007. I paid full rent throughout this period. My research has also shown that the being tied to Enterprise Inns for all of my stock can mean paying as much as £100 more for one 22 gallon barrel of Lager. This does seem an excessive amount and if reduced to adiVerence of £50–£70 a barrel would make a huge diVerence to our ability to operate a successful business. We are a busy pub and with a bit more help we could make a healthy profit and in turn become a better employer and better servant to the community. As it is, we are barely breaking even. I am juggling bills and getting threatened with legal action on a weekly basis. 29 September 2008

Memorandum submitted by Inez Ward 1.(a) I contacted Mr X of Unique Pub Company in early August of 2002 with a view of purchasing the lease for The Harvester, later to be changed to Mavericks Public House. I had been given Mr X’s telephone number by the then current landlady, Miss Y. A meeting was arranged and the options and views of Unique and ourselves were discussed. We were informed that we would need an initial ingoing of approximately £50,000.00 and that the rent for the lease would be £25,000.00 PA rpi linked. It was explained to Mr X that we were interested if the schedule of works could be ironed out, however we could do nothing until our house had sold as that was where the finances were being raised. 1.(b) Mr X arranged a meeting for the end of August/beginning of September 2002 and asked would we consider moving in under a tenancy agreement until we were in a position to sign for the lease. The provisions for the tenancy was a rent of £24,000.00 for the first year rising to £30,000.00 for the second year, this raised some concerns as far as we were aware the rent for the lease would be £25,000.00. When these concerns were raised with Mr X he assured me not to worry about it as we would be signed under the lease by the second year so that part of the tenancy would not come into question. Mr X confirmed that we would receive in writing the figure for the rent on the lease. Our other concern was that we did not have the ingoing for the Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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tenancy of approximately £15,000.00 we informed Mr X of this said that finances could be arranged through a loan. Mr X held no objections to this course of action and so a loan was taken out with Tesco in September of 2002 for a sum of £15,000.00. 1.(c) We were due to move in on Wednesday 23 October 2002 under the tenancy agreement, the stipulations being that I had the figure for the rent for the lease in writing and that the pub would be able to trade the day of signing ie. 23.10.02. I arrived at the pub at 10.30 am to meet with Mr X and take over the premises known as The Harvester. Upon arrival I was dismayed to find no Mr X, very little stock and no correspondence with reference to the rent for the lease. I stood for a few minutes and surveyed the carnage unfolding before me, after a short while I decided that perhaps I had made the wrong decision in agreeing to the tenancy. I gathered up the keys which had already been handed to me by that point along with the paperwork, staV uniforms and stools that I had brought with me. As I had left the premises and was making my way across the car park to my car Mr X arrived. I handed Mr X the keys and informed him that I would not be taking on the tenancy due to no beer and the fact that I still had not received in writing the figure for the rent on the lease. Mr X replied that I could have the rent figure for the lease immediately and that perhaps I could borrow some beer from somebody as my beer order would not be arriving until the next day. I informed Mr X that as this was his cock up and not mine he could arrange for borrowing beer as I was not having the embarrassment of on my first day in the trade having to ask to borrow beer, this would bring my abilities into question and was not something that I would wish to do as it was not good for business. Mr X acquiesced and arranged for some beer to be borrowed from The Mermaid and also from Fosters. The beer having been sorted and the figure for the rent on the lease received in writing I considered that all avenues had been covered and therefore moved in. 2.(a) By early February Mr X had started to exert pressure for us to sign the lease. Mr X was informed that until the house had been sold then it was not possible for the lease to be signed. He asked that we sign an agreement to lease and this is where the problems really began. The rent had jumped by 20% to £30,000.00pa rpi linked. We refused to sign the agreement until the rent had been reduced to the correct amount that we already had in writing ie £25,000.00. The arguments between Mr X and myself over this issue escalated until the point where he was asked to leave the premises and I barred him until he was willing to discuss these matters in a manner befitting an employee of such a large company. Mr X took umbrage to this statement and informed me that I had no right to do this as it was his pub. I replied to Mr X that as long as I was the licensee I had every right to ask whom ever I chose to leave as long as it was not discriminatory. At this point Mr X left the building, he did return about 20 minutes later with a slightly diVerent approach however the situation had not been resolved. 2.(b) In early March 2003 Mr X asked for a meeting to discuss the agreement for lease. At this meeting Mr X insisted that somebody else was interested in signing the lease and that if we didn’t sign the agreement at the new rent we would have to leave the premises within four weeks. After careful consideration we decided that we had very little choice, the house had been sold subject to contract, the kids had moved schools, we had given up full time employment and we had already invested a significant sum into the business. We found out at a later date that the alleged people interested in taking on the lease had in fact had no intentions whatsoever. We were made aware of this fact by the people concerned when they came into our pub one night in the summer of 2003. It is my opinion that Mr X misrepresented the facts on two separate occasions ie figure for the rent on the lease and then again to try and harass us into signing a contract that we had no intention of signing. The disagreement over the level of rent has continued from that day to this, even though there is expert evidence to the contrary and Enterprise Inns/Unique Pub Company have never provided a complete breakdown of how my rent was calculated as per the recommendations set in the 2004 TISC report, even though this has been asked for on several occasions of the whole organisation. 3.(a) By June 2006 things had become unsustainable and there was a meeting between ourselves and Enterprise Inns there are some points of this meeting that have never been satisfactorily answered. We made our accounts fully available to Mr X and informed him that the rent was unsustainable. Enterprise placed an oVer on the table, this was not acceptable due to the un-aVordability of the plan. Enterprise Inns were unhappy at our rejection of the proposal and immediately refused to deliver our beer. We oVered to pay for the beer order in cash, three days in advance of delivery, this was not acceptable to Enterprise Inns as a result of which we became free of tie in December 2006 as Enterprise Inns had failed to deliver beer for a period exceeding 14 days. By this point we were laughingly referred to as the pub with no beer, this caused me a huge amount of stress and undoubtedly aVected the business, I remember crying my self to sleep at nights. I consider this to be harassment as I had made an acceptable oVer to ensure that beer would be delivered without me breaking my tie obligations and can see of no valid reason why this proposal would not be acceptable to Enterprise Inns. Enterprise Inns issued court proceedings for forfeiture of lease and the case went to court on 29 January 2007 a consent order was made and maintained and finished one month ahead of schedule. It is my opinion that the period spent free of tie certainly enabled us to fulfil the consent order ahead of schedule. It is also my opinion that the court case was not required as I had always made it perfectly clear that I would repay the outstanding amount at a rate that was aVordable, as is proven. 4.(a) By the end of July 2007 it was blatantly obvious that the smoking ban, the bad summer and the impending credit crunch was taking its toll on business. This is a business that we had improved on year by year and suddenly hit a 20% downturn in trade, there had been no other disruptions to Mavericks continuing success. As I could see what was happening I started talks with Mr X re reducing the rent and some discounts Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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on the beers purchased. Enterprise put forward an oVer which was not acceptable, Mr X insisted that the terms and conditions had not yet been set as he was fully aware that a full on tie to include beers, wines, bottles, spirits and soft drinks would not be acceptable. Mr X was not happy when I took his copy of the terms and conditions and insisted that they were not relevant as they were not personal to Mavericks. When I asked him where the problem was he re-iterated his initial statement. 4.(b) Enterprise Inns placed another oVer on the table which did appear more favourable so we took it to our solicitor at that time, Mr H for his advice. I felt the need for legal advice as I was unhappy at how Enterprise Inns had conducted previous business and did not wish to make another mistake as in being harassed into signing another contract which was detrimental to ourselves. Mr X informed us not to sign the contract until he had seen the terms and conditions, I felt some safety at this point as I was fully aware that they would not be able to instigate a contract which was detrimental. As my husband and myself left Mr X’s oYce I rang Mr X to inform him that I required the terms and conditions before I could sign any contract as my solicitor wished to check them out. I had also contacted Mr Graham Edward Tuppen, the Chief Executive OYcer of Enterprise Inns asking for his help in this matter to which I received a reply from Mr X the Regional Director. There was no further contact from Mr X or Enterprise Inns until 28 November 2007. By this point there had been a story printed in the local press with reference to the fact of the boiler having broken down, Enterprise Inns refusal of help unless I signed the contract and a charity night held by the locals.

5.(a) On the afternoon of Wednesday 28 November 2007 Mr X rang me, this phone call was taken in the bar. Mr X was trying to arrange a meeting for the following week, I informed Mr X that I would not be able to arrange a meeting after Tuesday 4 December 2007 as I was booked in for a cardiac angiogram on Wednesday 5 December 2007. Mr X was fully aware that I had been experiencing chest pains and also that I was under investigation and had already endured a treadmill test and two nuclear stress tests and that they needed to do an angiogram due to the results of the previous tests. I was as unsure as anyone as to what would happen or how long I would be hospitalised for. At this point Mr X had become very heated so I removed myself from the bar area for fear of upsetting the customers. I again repeated to Mr X my reasons for not being able to arrange a date, he seemed unable to grasp this concept even when I gave him the telephone number for the hospital so that he could verify and confirm what I was saying as he had made it perfectly clear that he did not believe me. By this point I have become very upset and am visibly shaking there was no need for this harassment, I tried pointing out to Mr X that in reality there was no rush for a meeting as I had not yet received the terms and conditions for my solicitor to look at, this induced a rage in Mr X that I really cannot explain. He screamed down the phone at me that I had had a set of T&C.

5.(b) By this point I am very upset I cannot control my shaking, crying or temper I shouted back at Mr X stating his insistence that the T&C that I had in my possession was not personal to Mavericks this would appear to be the straw that broke the camels back, he screamed down the phone at me to just sign the contract. At this point I put the phone down on Mr X as I just could not take anymore, I am pretty sure that Mr X used foul language but could not swear to it as I had been so upset at his outburst, especially considering I had only asked for something that by rights they are obliged to give. It took approximately 10 minutes for me to compose myself enough to be able to return to the bar however I was unable to compose myself enough to hide the impact of this telephone call from my regulars who had been in the bar. I was visibly shaking from head to toe and could not control this, I was suVering waves of nausea which eventually resulted in me being sick on several occasions throughout the evening. My heart had been racing ever since the telephone call and no matter how much I tried to calm down nothing would work long term. There were periods of a fast heartbeat but not racing and pounding, in the end I had to tell my husband that I had to go to bed and that I thought I was probably going to need a doctor. Craig raced round trying to sort everything out and I went to bed, everything seemed to calm down so I shouted to Craig that I thought I might be ok and not to bother calling a doctor. Craig came and laid on the bed with me and we watched television for about quarter of an hour then things suddenly got a lot worse with the way I was feeling, Craig called a doctor immediately who sent out an ambulance on hearing the symptoms. Two ambulance crews arrived and they proceeded with lots of questions and tests they then gave me morphine and things became a little hazy after that. I do remember the ambulance man asking if anything had upset me that day and I told him a bit about the telephone call from Enterprise Inns he stated that he was writing that into his report and would I give my permission to which I agreed. The rest of the night passed in a haze of pain and drugs and total fear. Following the angiogram we were informed that I had suVered a small heart attack induced by stress.

5.(c) It is my opinion that this phone call was intended to frighten me into signing the contract without legal representation, for what reasons I am unsure and therefore cannot understand. I consider this to be severe harassment as Enterprise Inns had been informed that I would not sign the contract until my solicitor had seen the T&Cs. My husband informed Mr Tuppen of the actions and consequences of one of his employees. Mr X was moved from his post of covering the Cornwall area on the 5 December 2007. Mr L sent us a letter dated 6 December 2007 informing us of Mr X’s new appointment and asking us to wish him luck in the future, I consider this at the very least to be insensitive considering what I had just endured at the hands of this man. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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6. Upon feeling a little stronger I again contacted Enterprise Inns to try and sort out the whole mess. This again resulted in questions not being answered and threats of court for forfeiture of lease. I informed Mr L that if that was the only way forward then so be it but don’t threaten it to get your own way. Mr L wrote to me on 10 December with an unrealistic payment schedule or forfeiture proceedings would commence. The court case was heard on 5 February 2008 and a consent order made, which to date has been adhered to. 7. On 10 January 2008 I e-mailed Mr Tuppen, for which he sent a read receipt, asking for his help as he had been quoted in both national and trade press about how Enterprise Inns were willing to help struggling licensees and we were obviously struggling. I included copies of all my accounts and asked Mr Tuppen, as he was an accountant, for his expertise in ascertaining how the rent was maintainable and sustainable. 8. On 31 January 2008 our scheduled beer order had not arrived within its scheduled time window, I was somewhat mystified as to the reasons for this as payment had been made in cash at the bank on Tuesday 29 January 2008 as per the agreement. I rang supplyline to enquire what had happened to my beer order and was there any problems with delivery. I was informed that credit control had put a stop on the order I asked the telesales girl why this had happened as I had made the payments as per the agreement, she informed me that I would have to speak to credit control. Upon finally speaking to credit control they informed me that they had placed a stop as they had not received payment, I assured them that payment had been made and gave the relevant information and approximate time of payment. She then informed me that perhaps the bank were at fault as Enterprise Inns had definitely not received the monies due. By this time it was too late to speak to the bank as they had already closed, it was no use speaking to Enterprise any further as by this time nothing could be done to achieve delivery, another night of no beer in Mavericks yet again through no fault of my own. It is soul destroying to have to endure these conditions. The following morning I contacted the bank to confirm if indeed what Enterprise were informing me could be true. The bank informed me that they were no way at fault and that the monies cleared into Enterprise Inns bank account at 14.39 on Tuesday 29 January 2008. This fell within the perameters of the agreement and it is my opinion that Enterprise Inns were fully aware of these facts and their failure to deliver the beer and then try and shift the blame was purely harassment which certainly caused further distress. 9. On 14 February Miss G e-mailed me with a response from Mr L to the e-mail that had been sent to Mr Tuppen on the 10 January. This re-iterated previous points which were historical and not related to my request for help. Mr L stated that any rent review would be contested vigorously, I cannot understand the reason for this statement as Enterprise Inns had made it quite clear that until the consent order had been fulfilled they would not discuss the rent review. How can they contest vigorously something that has not even been proposed. It is my view that this was further harassment with a view to ensuring my earliest departure from Mavericks. This view was confirmed with the meeting with the new Regional Manager Mr M the following day. The rent review, as per their own codes of practice, should have been completed by 28 December 2007, this was before any court action had been instigated. 10. A meeting had been arranged for Friday 15 February 2008 with Mr M. Mr M had been informed by email that I would accept a meeting with him but that it had to be for a valid reason and that I certainly did not want a meeting that would cause any further distress or was likely not to achieve anything and so causing more distress. I did not wish for a futile meeting that would only ensure in upsetting me. My opinion of this meeting is that it was always intended to have the eVect of threatening and harassing me. It could certainly not be considered as a productive meeting that proved to be mutually beneficial to both parties, I can only consider it as yet another threat, more bullying and harassment. 11. Enterprise Inns have made it perfectly clear that they view me as an un-compliant tenant because of the approach that I have adopted, that is involving the whole organisation. I had no choice in this matter, I was asking for help, we have never drawn a wage since we have been here. We are in receipt of full tax credits, half of which go to Enterprise Inns, why should the government and ultimately the tax payer pay for the greed of this company. We have improved turnover year on year up until the current perfect storm that the entire trade is facing. We have worked in excess of 100 hours a week to achieve this, year on year the prices that we have to pay to Enterprise Inns have risen considerably, both on the rent and the trade accounts. The greed of this company is unbelievable, that is there only goal, they neither care for their pubs or their licensees. 12. It is my belief that Enterprise Inns have not only completely ignored the recommendations in the 2004 Select Committee Report, but they have breached their own contract and they have not followed their own codes of practice, they have completely abused their position of power and strength. My case with Enterprise Inns has involved the whole organisation including Mr Graham Edward Tuppen and Mr Simon Townsend. Everything I have said can be proven either in writing or with witness statements and if required I would be more than happy to speak in evidence as I would for any evidence to be published. Since writing this evidence it has come to light that there may be anomalies with reference to the initial electrical safety certificate issued by Unique, unfortunately I have run out of room on the evidence allowed to be submitted. I confirm that there is no requirement that the content of this, my submission, should be confidential and it’s content either in part of full may be printed in any subsequent report made by the Committee and that, if required, I am prepared to attend the Committee Hearings to give oral evidence in support of my comments and observations. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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I declare that this is my witness statement and that the information that I have given is true to the best of my knowledge and belief. 29 September 2008

Supplementary memorandum submitted by Inez Ward I have received no contact from the BII or Mr John McNamara whatsoever, then again I am not surprised, nearly a year ago Mr Robert Feal-Martinez sent my case and a case for Punch Taverns to Mr John McNamara for breaches of Codes of Practice and he never received a reply. I feel that the BII cannot and will not involve themselves in areas of dispute with the pubcos and feel that this could be due to the large revenues that the BII receive from the pubcos for the BII training packages. If the BII earn revenue from the pubcos then surely there has to be some conflict of interest when disputes between tenant and landlord arise? The latest update of my predicament/situation is not good. Enterprise Inns have started the rent review and there has been a reduction, however the reduction achieved does not portray a fair rent. A formal oVer has been put to Enterprise Inns by Mr David Morgan for a rent of £24,000.00, we are both of the opinion that this is not the true rental value for Mavericks. Enterprise Inns have failed to supply either myself or David with any evidence by way of comparability that supports the company’s view of Fair Maintainable Trade. We have had no choice other than to reach this decision as the current rent is strangling the business and there are no finances to even consider arbitration. If I could aVord to I would take it to arbitration, unfortunately that is not an option. The recession has hit hard, not just for myself but for many businesses, I am sure that this would be hard to refute. In light of this I have again asked Enterprise Inns for help, they touched on the subject of the Business Recovery Scheme (not forgetting that it was this scheme which led to the disputes last year and the ensuing heart attack) I asked by RM that if I could prove categorically that the proposed scheme of last year was of more benefit to Enterprise Inns than it was to Mavericks would they consider changing the terms. The answer no, some fair and equitable partnership. The other oVers of help from my RM was to do a march through Newquay along the lines of Gordon Ramsey and the kitchen nightmares tv programme and he could get me a council house by evicting me, both ideas I was not impressed with for obvious reasons. No wonder I feel so angry when I read press releases of how much Enterprise Inns are helping their tenants, the help they are professing is the Business Recovery Scheme! If you want the information on the Business Recovery Scheme I will gladly send it over. The stress and work hours have increased to unsustainable levels so my health is deteriorating, I have considered surrendering the lease but the cons of that action far outweighed the pros. If you would like to see this document, again I will gladly send it over, even the RM was in agreement in the main. We have cut all costs to an absolute bare minimum, again a fact that the RM was in agreement on. We do not draw a wage from the business and are in receipt of full tax credits, the majority of which goes to Enterprise Inns or business bills. In the last 12 months the business has turned over £128,829 net and we have paid to Enterprise Inns £89,427 which equate to 70% of net turnover. We run continual customer surveys to ensure that the customers are happy and are running at a 98% success rate. So the situation, without trying to sound too melodramatic is probably going to be bankruptcy unless my health goes first. Ted Tuppen has full knowledge of the situation, in fact it is one of the reasons that Enterprise Inns have taken the stance they have with myself because I involved the whole organisation, although just recently they are saying that I am an un-compliant tenant because I have not fulfilled the terms of the contract, by which they mean I have not paid the rent, which is neither fair or maintainable. They are also being quite forceful in their opinion that I am not being discriminated against, which makes it even worse that they treat everybody like this, do they have no morals or corporate social responsibility? I find it amusing that there was this change in opinion of how they viewed me as un-compliant tenant after they realized that there was an enquiry! Personally I don’t think they like it if anybody has the temerity to stand up to them, even when they are blatantly wrong, they are no more than greedy bullies. So they have breached their Codes of Practice, they have breached their contract, amongst everything else and there is absolutely nothing I can do about any of it.

Memorandum submitted by Anne Hewitt I read with great interest your request for information from licencees regarding concerns with their pubco “partners in business” as they like to call themselves. I have several grievences with the way they operate and I shall try to outline them as briefly as I can. I cannot understand their pricing structure and discount system that allows them to charge such inflated prices for the beer they supply to me as opposed to the cost of buying locally. For instance if I was to buy an 11 gall of bitter through Enterprise I would be paying between £20 and £30 more than I could get it locally and this would not be buying in bulk but on a like for like basis of one barrel at a time. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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I am also at the moment on the SIBA scheme which allows me to buy cask ales from small breweries around the country but be invoiced by Enterprise for the beer, this again has a mark up of around £30 on a 9 gall against what I could buy it direct for. I have built up my trade on supplying these small brewery ales and am now well known for this, and I have to say this is the ONLY thing that has kept me afloat through the recent demise of the pub trade, however Enterprise in their wisdom are stopping this facility for me as of the 1st October thus restricting my trade and enevitably my ability to compete with other outlets in the area. I have tried unsuccessfully to appeal to them to take another look into their decision but they seem unable or unwilling to do so, and the feeling that I am getting is that they could’nt care less if I go under. I did have to wonder however if there was an ulterior motive on their part (as I have an old Whitbread lease which only ties me for beer. I don’t have to have brewlines and I also have a guest pump I can purchase from anywhere) as they oVered to allow me to stay on the SIBA scheme for my other two hand pumps, if I installed brewlines or gave away my right to a guest pump, both of which seem like blackmail to me. The only other alternative reason I can think of is that they want me to walk away so they can take the lease back and convert it into one of their own with a tie for everything.

I have also had the pub up for sale, and recently aquired a buyer, they were a partnership one having the money and the other many years of experience, however Enterprise would not allow the assignment, giving about 15 reasons why not all of which were very superfluous and all of which applied to me when I took the lease so what is diVerent now. I am unwell and wish to retire but they seem hell bent on making life as diYcult as possible, and I know there are others in a similar position to me as there is hardly a pub in my area that is NOT for sale.

Enterprise Inns treat us like wayward employees when in fact it our own money that we risk if our business fails, they have no financial outlay as we pay for all repairs and decorating costs and even have to pay there solicitors and admin fees if we should be so lucky as to get a buyer they LIKE., not to mention the dreaded delap list they will present us with. They have spent the last few years ignoring any delapidations that needed addressing and allowing assignments to go through without checking if they have been done, and now they have suddenly realised that they have a lot of properties in bad repair through there own negligence, and us poor buggers have now got to pay for their ineYciency as they have decided it’s time to clamp down incase they have to spend some of their shareholders money putting things right.

We recently read in trade newspapers that the pubco’s were giving millions to tenants in help during this diYcult time, well I think someone must have got mine as our BDM has had no help to oVer or any constructive advice, only telling me where he is going for the third holiday of the year—I certainly have had no financial aid from them whatsoever.

I have been fairly lucky however that our reputation for cask ales has kept us afloat, and now they are even making that more diYcult for us.

I can only hope that we never get a “partner” than really does’nt like us. 29 September 2008

Memorandum submitted by Mr and Mrs K Hutton

My husband and I have been licensees at the above mentioned pub for the past three years, we have seen our business suVer because of various reasons—ie smoking ban, prices, etc, we work so hard to try to stay afloat we have had to make cut backs and are working very long hours to save our staV wages, but whatever we do it never seems quite enough.

We have recently (three months ago) requested a meeting with Enterprise to discuss a rent reduction— our rent was increased by £1,000 a month in March last year, and we have struggled ever since. Just prior to this the only road to our pub (we are situated on Ilkley Moors) was closed for six weeks, we asked Enterprise that seeing as the business had been badly disrupted and lost money due to customers not being able to get to us except by a very long diversion, they could see their way reducing the increase in our rent in proportion with the loss in revenue. This fell on deaf ears as the recent request we have made for a rent reduction seem to have, we therefore think it very unfair that we are tied to Enterprise for purchasing our beers and lagers at high prices—which in turn puts people oV coming out drinking, and yet are charged what we consider a very high rent.

It seems to be the only business where the harder you work the less help you get. 29 September 2008 Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by JAT Leisure In response to the article in the Coin Slot dated 17 July 2008. I have been in the gaming industry since 1996 and a certificated operator of gaming equipment since 1974 and have experienced everything that the tied public house trade can throw at an independent operator. I have been forced out of over 250 public houses over the 34 years and I can assure you that not one of our customers were better oV under either the brewery’s or later the parasite pub co’s control. When in 1985 the EEC directive banning Brewery’s from holding their tenants to ransom by controlling not only suppliers of products but the amount they would pay that supplier we the independent operator thought thank God for that it had been long overdue, however most breweries turned a blind eye to the ruling and they did not take any notice of the directive until 1990 when leases due to European Courts ruling against them, that leases began to be given out free of ties. We the independents had a short but very productive period up until Mrs Thatcher allowed (Dick Turpin of the brewing trade) Lord Young to come up with the brilliant idea that no brewery should be allowed to own more than 2,000 public houses (Youngers brewery had just 2,000 houses). He had already spotted the loophole in the wording of the EEC directive that only mentioned a brewery not an estate agent or other body hence the birth of the parasites companies such as Punch Taverns whose shareholders were the same as the breweries and they were back in the robbing business ripping the heart out of the retail public house trade. The tied tenant is now in a far worse position than they were under the old brewery tied system at least the breweries wanted the houses to continue to sell their products. The pubco’s tenants are forced to have everything from a nominated supplier with the parasite pub co getting a cut or back hander from the supplier called a royalty in the trade, this is in addition to taking over half of all the takings from any type of amusement machine with the tenant paying the rents and licenses out of their share. 29 September 2008

Memorandum submitted by Shepherd Neame Shepherd Neame is a relatively small family controlled vertically integrated Brewery operating a tied estate of 370 public houses located in the South east, of which 50 are managed and 320 are tenanted. Shepherd Neame supplies both the On and OV trade on a national basis. Shepherd Neame belongs to the BBPA, have contributed to and would fully endorse the BBPA submission to the Committee. Shepherd Neame would contend that the potential for imbalance of risk/reward within the Landlord/ Tenant relationship which is at the heart of the inquiry is significantly reduced in the case of the traditional tenancy model of this relationship as opposed to the FRI lease model. 1. The Landlord carries all the risk for the cost of structural deterioration of premises. 2. The Landlord additionally bears the cost of building insurance, external redecoration and signage and maintenance of fixtures. 3. The Landlord provides significant operational support with training, promotional activity and rating advice. 4. The Landlord holds and deals with all issues relating to the Premises License. 5. The Traditional Tenancy is a low cost entry point to the licensed trade with no goodwill payment required. 6. The Tenant is able to issue notice to quit at any time with the landlord obliged to purchase the inventory if necessary. Shepherd Neame believes that income sharing is appropriate for AWPs. If this income were not shared it would be rentalised and we believe this would be disadvantageous for the tenants at a time when AWP income is falling. As multi-site operators, pub companies can negotiate terms and obtain specialist advice not available to individual operators. Shepherd Neame believes that rents need to be sustainable and that no single method of rental valuation should be prescribed. There are a number of factors involved in arriving at a fair rent and it is important that valuation be flexible. There has not been a request for arbitration within the Shepherd Neame estate for 20 years. Shepherd Neame maintains close relations with their licensees with senior management accessible and Business Development Managers in close contact with all their tenants. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Shepherd Neame would suggest that current economic/trading conditions will reward those companies which provide marketing/promotional assistance for tenants and which acknowledge the need for a flexible policy in respect of rents. There is no benefit to be derived from vacant premises and in the current diYcult trading conditions the level of landlord support is increasing. 29 September 2008

Memorandum submitted by Nigel Wakefield I have been asked by a member of Fair Pint to submit my findings to the Select Committee, I would like to stress that I am doing this independently of Fair Pint and my research was instigated by the amount of BII members who were in trouble and called me asking for advice. One of the founders of Fair Pint has been good enough to provide a pro bono service for these people and has now gone on to give advice to the Welfare Section of the Licensed Trade Charity, which I am also a member, it is he who asked me if I would write to you. I have for the last 36 years been involved in the licensed industry, owning free houses, restaurants and commercial property,I have in addition held a Consultancy job with the BII (British Institute of Inn keeping) since 1997 looking after membership in a large area of the South West and have covered most of the South of England at diVerent times during that period. Initially the changeover rate in pubs averaged about every three years for the majority of pubs, the total failure rate was minimal, since a struggling licensee normally managed to sell before they got in to serious trouble. However the failure rate has escalated dramatically with the growth of the Pub Co’s following the Beer Orders restrictions on brewer’s ownership of large numbers of pubs. My concerns were the amount of members ringing me for advice because they were in trouble and the ones that I met who were struggling, the main problem appeared initially to be with the major Pub Co’s with high rents and lack of discounts within the tie. As time progressed, licensees from, in my opinion, the better brewers were also in trouble with unsustainable rents and the tie. I met the Chief Executive of Enterprise Inns some five years ago and he said that he wanted the best operators in the country and I said he needed to change his method of operation, as a result I had a lengthy meeting with their Senior Development Manager. I suggested a number of proposals such as incentive based discounts within the tie and realistic rents rather than unsustainable ones, which he discounted. I also suggested that they sell their underperforming pubs back into the open market individually to create stability within the free house sector, rather than creating an enhanced scarcity value for available good free houses, he said that they would not do this and gave me a strange smile, they would in fact only sell them in tranches to other Pub Co’s or for alternative use with an exclusion on being used for a pub again. The smile rather than his comments caused me concern until I realised what was actually going on, by buying all available good free houses and starving the free house market, paying in a number of cases over the top prices and in turn putting unsustainable rents on the properties, the high rent level was then used to create an artificially high pub value, they were inflating the values of their estates to fund further borrowing and expansion. By selling tranches of underperforming pubs with high rents and high values to other lesser Pub Co’s the high values persisted. On paper with the high rents and the high values they sounded like a good proposition. One major Pub Co’s so called average valuation of their pubs was £762,000 if you look at the Free houses for sale in any Trade Paper and they run from £200,000 to £650,000 for a very good one, there are others in the millions with exceptional business, but the bulk are within the lesser range. The £200–650K pubs are valued in the main on turnover and viability, not over hyped rents. However the failure rate across the board escalated, the majority of pub owning companies followed suit in raising rents to unsustainable levels, again enhancing their estate valuations, even more lessees and tenants were and are struggling. The root cause of this rent hike goes back to Valuation Document 2 produced by the RICS (Royal Institution of Chartered Surveyors). A committee was set up by the RICS, chaired by a Robert May who described himself as Pub Expert, but in fact was and is the Chief Rent Negotiator for Enterprise Inns, a number of other members of the committee I have been informed were also either retained surveyors or in the employ of the Pub Co’s directly or indirectly. This would appear to have been a reasonably logical thing to do by the RICS, to have people who were directly involved in settings rents and valuations within the industry, with hind sight these people were dependent on Pub Co fees and remuneration and very much under their paymasters demands, there would not however appear to be any Surveyors on the committee who had solely represented lessees or tenants interests or a Surveyor who had the foresight to realise the long term implications of this document for lessees or tenants. From their correspondence I am lead to believe that all members of the committee acted for Pub Co’s in a greater or lesser way. The document states that rent should be assessed on future sustainable trading potential by a competent operator, in another section of the document suitability and economic adaptability of the property for a diVerent and more profitable style of operation. 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Both these statements enable the landlords surveyor to cherry pick almost any scenario or valuation that they care to choose, if they are going to ignore the existing trading accounts, which they frequently claim are not available or not reliable, even with newly acquired properties or repossessed leases, in my opinion the majority of rents are far beyond the capability of competent operators and certainly way beyond the people that they are assigning leases to. The term competent operator as defined by the Vice Chairman of the BII is a person with at least three years profitable trading and advanced BII qualifications or five years profitable trading and basic qualifications, which I as a senior member of the BII agree. The RICS did not consult with the BII as to an accurate definition of a competent operator and as to how you can accurately calculate the future sustainable trading potential of a pub. None of these Surveyors have ever run pubs to the standard of competent operator, it would take me up to a week of serious research with accounts, investigating where my business would come from and a full SWAT analysis to give a conservative and reasonably precise estimate of a pubs trading potential. Yet these Surveyors pay a fleeting visit if at all, rely on a BDM’s (Business Development Manager) view of the business, very few of the BDM’s that I have met have ever run pubs successfully and are usually ex trade reps who understand corporate targets and paper work. They are both under corporate pressure to achieve the highest rent possible regardless of the consequences, new leases would appear to go mainly to new people to the business, they believe the corporate welcome package and never question the rent and basis for it’s level, these newcomers fail in the main within eighteen months, a few survive but they are very disillusioned and are looking to get out. One very seriously misleading requirement is a Business Plan demanded by the Pub Co’s, I had until last week assumed that this was produced by the lessee to prove the viability of his intentions and ability to meet the rental levels, overheads etc and produce a profit. A solicitor told me that over the last five years no Business Plan had been queried or rejected by any of the Pub Co’s that he dealt with. I had talked to one of his clients three weeks ago who wanted advice on the BII and he told me that he was completing on the lease purchase because the Pub Co had approved his Business Plan, the inference was that it was totally viable. I then realised that he would need to increase his business by very nearly if not 300% to break even, which in this climate is virtually impossible. On further checking I have discovered that many more honest, naı¨ve people failed to take further professional advice because of the acceptance by the Pub Co of the Business Plan convinced them that their plans were viable. Pub Co’s hiding behind Caveat Emptor is legal but morally unacceptable. The following is an extract from a member of the RICS who is well aware of this misleading abuse by the Pub Co’s. The mantra used by the Pub Co’s is that an application for assignment is to test the applicant’s financial probity. They will always say that they are not privy to the vendor’s accounts and thus the genuine viability of a proposed business plan is not a matter for them to form a judgement. In law they cannot be faulted for this line of reasoning. In equity however they are in a position of vicarious responsibility and should give a total support package which includes business viability. After all, that issue is at the very core of rent review. Having set a high rent the lease is cast in stone and unless they can sell it on to another naı¨ve would be licensee, otherwise they are liable for the duration of the lease. The rent bears no relation to the trading viability of the pub except with high turnover pubs where the bricks and mortar valuation is below the valuation set by the turnover, the middle and lower end pubs have high unsustainable rents which enhances the freehold value. The Pub Co’s put most of their new lessees through basic qualifications, the NCPLH (National Certificate for Personal Licence Holders) and sometimes the BII Licensed Retailing Exam which replaced the old BII Induction Exam, a three day elementary course on running licensed premises, totally insuYcient to qualify as a competent operator. The old brewers always used to put new licensees into starter pubs and then if they progressed, into promotion pubs. With leases, there is no escape they are tied until they can assign it or fail and get evicted, even then they are tied as guarantor for whoever they have assigned the lease to. The high unsustainable rents and abuses of the tie by a large number of Pub Co’s is causing extreme hardship to thousands of people, the Licensed Trade Charity is inundated with welfare cases, not from new lessees but long term professionals who are being evicted from their pubs. I was sent a copy of one Pub Co’s failed, abandoned, repossessed records for the last two and a half years, it shows just under 6,000 pubs, some have changed many times. The person that sent it to me is horrified at what is happening within the company, these details were also confirmed by a senior manager with the company who is equally as unhappy, this is a terrible indictment of the Pub Co operation. I cannot use these statistics since they were sent to me anonymously.But I hope that you can insist on these Pub Co’s producing these records, the final detail that you should insist on are the amounts of pubs on cash with order or rescue packages, their future unless they can sell the lease is decidedly limited, their cash flow is non existent, the rescue packages almost always insist on a tie for every item that they sell. The Pub Co’s inflate the prices of all goods supplied to extract the maximum discount for themselves and do not pass on to the lessee, any benefit that they supposedly give is repayable should the lessee sell the lease, the chances of a lessee surviving under these conditions is minimal, they are corporately expendable and it is purely time before another one Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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comes in with suYcient money to survive for a year. The leases have minimal value, since the rents have been set so high the majority of experienced operators would consider them uneconomic, but there are always people that believe the corporate web sites. I have raised the valuation issues with the RICS, which from their correspondence are either totally unaware of the realities of the pub industry in it’s present form or are choosing to sit on their hands rather than admit that their instructions are being used to the most detrimental eVect. They would appear to be more concerned with protecting their professional integrity than investigating the distress created across the industry by surveyors who it could be very easily construed as having vested interests in raising rents to extreme or unsustainable levels to suit their paymasters and employers. I am enclosing a copy of “The Great Pub Co Con”(not printed here) which I am assured by members of these companies is exactly what has gone on and is going on, the names have been removed for legal reasons, it is designed to make people ask questions and hopefully make you also ask questions. I am also enclosing all my correspondence to the RICS and their replies and any other correspondence (not printed here), including the Valuation Document with the oVending sections highlighted, that I think will help you. The BII have insisted that I am doing this on my own, regardless of the fact that a number of senior and ordinary members are supporting me including members of the BII General Council. Two final suggestions to be considered one would be that an independant regulatory body be set up to investigate abuses within the tied and leased industry, that is not funded by or reliant on pub owning companies for their financial support, the other a totally open method of rent calculation based on existing business and not a convoluted jumble of calculations that only one person understands, more caring Pub owners work on a realistic percentage of turnover, if the turnover is low there is an incentive to increase the business and where a tie exists the owner benefits from increased sales. My apologies for the profuse correspondence and repetition, but I consider the abuse of the rent assessment as the key to the problems and failures within the industry, the tie and misuse of that I will leave to others more knowledgeable than I. I have no objection to my comments being put into the Public Domain, and should you so require be pleased to discuss my comments with your Committee.

Supplementary memorandum submitted by Nigel Wakefield I have just been to one of the D11 Rent Road Shows sponsored by a number of the largest Pub Co’s. My submission was based on the massive failure rate of our D11 members and others caused by unsustainable rents and the supposed methods to calculate them, set in motion by, in mine and many others opinion a seriously flawed directive by the RICS. The Rent Road Show was extremely interesting since it’s aim was to get more openness Into rent appeals and matters relating to rental assessment to enhance the RU Codes of Practice that a number of Pub Co’s have put forward to suit their Individual methods of operation. I assumed wrongly that a complex mathematical approach would be implemented to assess rent Increases or valuations for individual pubs. I sat there, with total incredulity, whilst one of the so called top Rental Valuers told that, his method would be to go two three or four local pubs within a ten mile radius and ask the landlord what his rent was and by using comparables arrive at figure, discounting the best and worst pubs. Because of his position he would probably have rent details if the others were owned by a Pub Co that he deals with. Accounts of the pub in question could not be used, since they would be possibly out of date or unreliable, he declined to use the full description of Competent Operator as used by the RICS and failed to give a definition of what he considered met that criteria. I deal with licensees all the time, very few would rush to tell a total stranger what their actual rent was unless severely over rented, these who based their rent on a percentage of turnover of the traditional brewers, would not tell anyone what their actual rent is or by so doing their turnover. We then had a presentation by a Director of Enterprise Inns which was most impressive. about what they were doing and going to do. I had a lengthy talk with him pointing out some of the over renting on pubs seeking my advice He agreed to investigate an suggested a permanent rent reduction rather than a rescue package, which if it happens will be a start, if nothing happens i will inform you. I raised the issue of Business Plans and people signing leases because Pub Co’s have accepted their business plans, regardless of the viability of the pub or plan, i pointed out that Caveat Emptor applies and has been quoted by the RICS and selling agents, he said this was totally unacceptable i again pointed out that a solicitor who contacted me had not had a Business Plan queried or rejected by a Pub Co in five years regardless of the viability of the pub, again he said he would investigate since the acceptance of the plans was done at Regional Manager level as with the rents. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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I and one of my colleagues had emailed over a thousand lessees to see if they could obtain a copy of the rent calculations on their leases, to date nobody has received anything, I wrongly assumed that in any rent review the business viability and turnover had some relevance assessing rent. It confirms my suspicions that the whole rental system is totally flawed and open to abuse and misuse by unscrupulous people and companies and I am even more convinced that my original findings are correct. The values of freehouses are normally based on one and quarter to one and a half times turnover, in extreme cases in a buoyant market they could get to double the turnover which can make borrowing diYcult or limited. By ignoring the turnover in rent assessment and over valuing the rent, this increases the notional value of the property, in many cases well beyond the pubs viable business value, this has been used as previously mentioned to fund additional acquisitions, which from most City analysts Is raising questions about the whole viability of the Pub Co operation. I have also been advised that the recent further hike in rents in a number of companies with the fall in business is to meet the REIT requirements, which raises further issues, which I will leave to people with more experience than I on the subject. I am also enclosing copies of Morgan Stanley’s report on various Pub Co’s where they stress that unsustainable rents are causing serious problems within the Industry. I have no desire to see these Pub Co’s collapse because of the financial strife that it will cause to a large number of struggling lessees, but their operations have to be changed. The rental levels that have become the Norm are unsustainable and the SACS Valuation document needs totally revising to Include business viability. I trust that you will discover the real truth behind all these activities rather than the corporate spin. 29 September 2008

Letter from RICS to Nigel Wakefield dated 11 August 2008 Re: Your letter dated 7th July 2008 Following receipt of your letter of 7 July, I referred it to two longstanding licensed property specialists, both of whom are in private practice. Each has dealt with public house valuation for over twenty-five years and both they, and colleagues, accept instructions from both landlords and tenants. This includes clients from the large public house companies and their tenants. The following is their response to your letter: We have reviewed Mr Wakefield’s letter. We believe that there is a fundamental misunderstanding of the technical approach to the Profits Method of Valuation, which is the appropriate method to adopt for all forms of trading asset. Public houses are only a sector of the trading asset market. Each sector requires specialist knowledge, particularly with regard to operational issues. The way a ten-pin bowling complex is valued, or a theatre, will be the same but the valuer must be experienced in the operational aspects of the business in order to adopt the Profits Method of Valuation. The fundamental principle of any profits valuation is that of Fair Maintainable Trade and Net Profit. It is the valuer’s job to assess what level of turnover and profit a Reasonably EYcient Operator would achieve from the business, assuming the premises are properly repaired, maintained and decorated. The actual trading results of a business will be reviewed and analysed if they are available, but this should not form the only reference information for the valuation as is suggested by Mr Wakefield. This is for several reasons. Firstly, the premises may not be properly repaired, maintained and decorated. The valuer will need to assess the trading potential of the Reasonably EYcient Operator in the FMT scenario, and then, if required, make an allowance to bring the premises up to the appropriate standard. With a rent review of a lease, the valuer, whether acting for landlord or tenant, will need to assume all the covenants of the lease have been complied with. This is particularly important where the lease incorporates full repairing and decorating provisions. Secondly, the actual accounts might relate to a business which does not trade to full potential, eg a licensee who chooses not to provide the full range of services usually associated with a business of its style and location, or an elderly licensee not wanting to work so many hours. Most importantly, the valuer must disregard any personal goodwill, which will have the opposite eVect to the above examples, where the business opens all day, every day and provides all manor of additional services due to the licensees entrepreneurial flair. It is just as unfair on a landlord to value on the actual accounts of a mediocre licensee as it is on a tenant who is clearly above average, or indeed, exceptional. Quite often valuers do not fully understand the full principles of the Profits Method of Valuation, which gives rise to apparent anomalies in its application. This is why it is essential that valuers who accept such instructions have the appropriate knowledge and experience. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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With regard to the large PubCos employing Chartered Surveyors, this is a commercial matter, and the engagement of qualified and experienced specialists must be correct. We understand the valuer will be looking to present the best case in negotiation for his “client”, the landlord. Similarly, a valuer acting on behalf of a tenant will do everything he can to present his case for the lowest possible rent; this is no diVerent to any rent review negotiation. With regard to Mr May’s position as Chairman of the TRVG Committee, he has several important areas of responsibility, largely communication between Committees such as those that deal with accounting standards, international matters, plant and machinery, taxation etc. VIP 2 was drafted by the two of us and approved by the committee as a whole. It was revised to take account of some ambiguous aspects and to ensure it complies with the latest legislation. We were also asked to address rental matters in more detail. Chartered Surveyors do not create a market. They analyse what the market is transacting. All sale and lease transactions are freely negotiated. DiVerent parties will play to a diVerent agenda. It is the valuer’s task to investigate and analyse such transactions and apply the evidence to a specific situation. In negotiation, the valuer will attempt to agree the best result for his client. Each party is free to walk away from a proposed transaction. Unfortunately, many public house licensees choose not to seek advice for personal reasons, and freely agree terms which may not be in line with the raft of evidence. A valuer who is appointed to report as an Expert is in a diVerent position to one who is appointed to advise and negotiate. Overall, we do not see how a landlord will benefit, in the long term, by agreeing rents at an artificially high level. If it puts an individual business in jeopardy, it will have a negative eVect on the overall business. What is important is that valuers fully understand what they are doing and how to do it. The Profits Method of Valuation has always been the most appropriate method to adopt; it is the application that is key to a successful market. At the same time, the market needs to reflect changing circumstances, but inevitably there will be some lag due to the nature of property transactions. The current economic situation is clearly causing diYculties to all types of retailer; public houses included. The fact that the industry is also suVering the eVects of the Smoking Ban and the severe competition from the oV-trade, are matters that experienced licensed property valuers are well aware of and seek to reflect in the advice they provide. We believe most public house landlord companies are well aware of these facts. We cannot comment upon the recruitment processes of the PubCos other than to say that they appear top provide more support and training today than has been the case in the past. The principle of FMT assumes a Reasonably EYcient Operator, a term derived from International Accounting Standards. This is what we used to call an average competent licensee—it does not suggest a highly trained, longstanding licensee, but someone with a reasonable amount of training and experience, perhaps as a manager or senior support staV.

This is a direct copy of the response they have provided to your letter. We will respond to the BERR consultation on the subject in due course.

Further supplementary memorandum submitted by Nigel Wakefield

I did say in my last letter that I would inform the Select Committee regarding my meeting with a Director of Enterprise Inns and his investigation into over renting on several pubs suVering extreme hardship, as yet none have heard anything about a permanent rent review or even any form of enquiry. To be fair these pubs do not come under this particular Director’s area.

Since putting my submission in, two of the so called leading Rent Valuers who spoke at the BII Rent Road Shows, one I was extremely critical of, have now publicly admitted in the press that rent assessment on lower end pubs needs revising, they cannot admit that the whole system is open to abuse because of the RICS Valuation Document and raising doubts about the credibility of the RICS, but the lower end will be a start, be assured the problems run right through all levels, the only reason that the high turnover pubs are not being included in their statements is that they have a slightly bigger financial cushion than low level turnover pubs and the visible eVects are not so obvious.

I spoke to the CEO of the BII yesterday, I will be surprised if you get any comment from the BII because the Enquiry comes under a Trade Dispute which would appear to be outside their conditions regarding Charitable. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Further supplementary memorandum submitted by Nigel Wakefield As always some further thoughts after having read the transcripts. The key problem regarding the tie are obviously the discounts, not necessarily the selection of beers and other products. When I first bought a freehold pub the maximum discount available to me was about 5% which made minimal diVerence to my selling price. The Pub Co’s without exception have forced the discounts to comparatively extreme levels, some three years ago the Coors Area Manager was having to raise the price of one of their beers way above their selling norm so that certain Pub Co’s could achieve their £200 per brewers barrel discount, likewise a colleague who runs a small brewery has to do the same to supply a particular Pub Co. If discussions were held with brewers and genuine wholesalers restricting the discount available eg 5% brewer to wholesaler, 5% wholesaler to retailer, brewer to retailer 10%, this would eVectively stop the present disparity and exploitation of discounts, this would also apply to supermarket chains, hopefully restricting the sale of cheap beers. The retailer would then be in the position of selling competitively, the present system has got completely out of hand with all Pub Co’s picking up excessive profits from discounts which are not passed on to the tenants. If after some research, it should mean that the Pubs would be able to sell beer more competitively and the supermarket prices would rise or be at least vaguely comparable. The percentages are purely an indication and if the idea was acceptable would require in depth discussions with brewers, one major brewer was complaining recently that they were only making £10 on every barrel sold to the Pub Co’s, if correct the industry is being dictated to on all scores by the Pub Co’s. The extreme discounts in a free of tie market would make little diVerence in a substantially tied market it creates very serious problems if 90% of the discounts are not passed on. If this was applied to all the products that Pub Co’s theoretically control the tie would become largely irrelevant, until they found another direction to extract benefit from the tie, if there are any left. The more that I see and read about my original submission based on rental valuations convinces me that any assessment not based on business viability will cause more hardship, having met a number of surveyors since making my submission, the comparables method is so hit and miss and these surveyors have no experience of running pubs, it is a frightening farce.

Further supplementary evidence from Nigel Wakefield I have just listened to the first phase of the inquiry and I noticed that they were asking for comments. One question by one of the Committee was evidence of hardship, the Welfare Section of the Licensed Trade Charity would be delighted to give you details on the increase of people in trouble that they have and that is only a small section. Reasons for people to go to Pub Co’s, they believe the Web Sites, publicity, agents selling the leases and the Pub Co’s selling their own repossessed leases, with hindsight they cannot believe that they were so gullible and the fact that these are big National Companies and they sign because their Business Plan has been accepted, this is the clincher. I and a Solicitor colleague have never heard of a business plan being queried or rejected in five years. The constant reference to comparables in terms of rent assessment, this would be fine if the base rental was correct in terms of viability, but by constant use and misuse the comparables have enabled there to be very upward spiral, since every lessee that capitulates under threat raise the level further.

Further supplementary evidence from Nigel Wakefield I and many other members of the BII have just realised that John McNamara is appearing at the next hearing that the Pub Co’s will be giving evidence. It was always stressed that my submission to the Select Committee was always totally independent of the BII and that they could not be associated with it, which I accepted. My main point was the RICS method of Valuation and the use of basic BII qualifications to satisfy a requirement far in excess of the qualifications and experience provided. I raised these points to the RICS and after their only reply I suggested that possibly an informal discussion take place to resolve these points before the Select Committee convened, they did not reply at all. I then raised these points with Steve Howe Director of Membership for the BII and then had a meeting with John McNamara and Steve Howe and discussed these points saying that the rental levels were causing great hardship to our members, which goes without saying, and the qualifications being used were incapable of providing the level of professionalism to satisfy the requirement of a Competent Operator. The RICS have Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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now toned this down to a reasonably successful operator. John McNamara said that they could not get involved because of their Charitable Status and that it was Trade Protection, I pointed out that the RICS Valuation System was the root cause of the abuse, by misuse and over interpretation for financial convenience, However if the BII wrote to the RICS as one professional body to another expressing concerns about the eVect that the Valuation method was having on our members and suggesting that we have an informal discussion to at least try and resolve some or all of the problems before the Select Committee Hearings, then both bodies would not come under adverse comment. John McNamara agreed to do this but I in turn had to promise not to tell anyone about the letter, which I agreed. If the RICS failed to respond that was their problem and at least the BII would be seen to have made a serious attempt at resolving a very serious issue. I obviously could not mention this in my submission because of the timing, but I discovered the day before the first hearing that no letter was sent from the BII to the RICS and now the appearance is that John McNamara is representing the BII on the day that the Pub Co’s are giving evidence. At the meeting they both agreed that by a softly, softly approach this matter might be resolved or improved and that the present system used by Pub Co’s was causing serious problems to membership. Sadly they eVectively silenced me, until the Select Committee convened, some of the more senior members of the BII are not happy about this. 28 November 2008

Memorandum submitted anonymously In my experience the BBPA Code of Practice has not been robustly adopted by the Major Pubcos, Enterprise Inns Plc most particularly. In January 2007 I was in correspondence with G E Tuppen, CEO Enterprise Inns plc concerning complete lack of support/business advice/guidance as given by any of five Business Development Managers I had encountered during my tenure with Unique/Enterprise pubco. Having just devoted six years of my life, some considerable physical, mental and financial Investment Included, I was on the verge of Bankruptcy. Potted history of me. . .. 52 years of age, thirty-plus years experience in the licensed and catering trades having managed my first pub at the age of 21. Former Member of B I and Member of CFA, Craft Guild of Chefs since 1976. Former vice-Chairman of local Parliamentary Constituency Assn, and founding Chairman of Penarth and Dinas Powis Pubwatch Scheme. Attended 2004 TISC as a interested observer. Took on my first pubco opportunity with Unique (now Enterprise). In May 2001: Pushed into signing a new lease by my then BDM, ahead of completion of Schedule of Dilapidations from out-going lessee. Was oVered further opportunity in a neighbouring county, no in-going and a full refurbishment planned. I’d obviously become a “good catch” for the BDM and with a growing track-record of perceived success, took on a third opportunity. So, within the space of six months I was now responsible for the running repairs, rent and trade of three, previously near-closed premises. Upon requesting trading Information on each of the three premises, is provided with nothing by the pubco, aiming that they did not have access to the out-going lessees’ records. Neither did they provide any sight of barrelage or purchasing trends. Each of the three premises, i later discovered, had a record of recent and continuing financial diYculty of which the BDM would have been patently aware. I battled on, with varying degrees of success. I oV-loaded one of the additional opportunities, by Introducing a couple who moved to a new lease, having lost circa. £20,000 In the 12 months I had operated the business The Schedule of Dilapidations In the original premises poorly executed and, despite constant reminders to the Estates Dept. I was unable to achieve completion of some of the most basic requirements, it has been particularly irksome to find a number of the very items I was waiting for completion on, to have appeared on my out-going Schedule! despite having spent over £40,000 of my own money on improving basic facilities In the main business, for example, new bar-fronts, extensive wall-panelling, shelving and skirtings, together with a feature fireplace and new fixed-seating throughout; that was claimed by enterprise as “landlord’s fittings”. Whilst those works were undertaken the BDM in place suggested that he could arrange a rent concession, given that I was having some diYculty in selling the other remaining lease and that it was costing me some £900 per week to maintain It as going-concern. I was consistently working some 90–100 hours per wet. The only time we saw a BDM was if the rent was late or trade payments were delayed in any way. Or, as in the can of the requirements of the new Licensing Act, to make sure our Premises Application was in at a further cost to us of some £2,000. Routinely, deliveries would turn up late or damaged the BDM was nowhere to be seen then! Maintenance issues would be passed from pillar to post with no tangible or Immediate solution oVered. In particular, drainage and cellar-cooling problems would be ignored at peak times in both properties and ultimately it was left to me to arrange and pay for temporary solutions whilst they “looked into it”. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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When I eventually disposed of the second “opportunity” at a net operating loss of some £60,000 over three years, I moved the manager and his working partner to the main business which was now performing well at around £10–12,000 of weekly turnover, entirely due to my eVorts. However, because the accommodation above the pub was uninhabitable (it was de-listed for the purpose of Council Tax), I had to rent a further flat to provide them with the live-in portion of their salary package. Mr Tuppen is happy to champion the value of the live-in benefit to be around £9,000 per annum. He was not so happy to compensate me for the loss of amenity, however. Nor was he prepared to reduce the rental on the un-usable portion of the premises. Ultimately, I must accept full responsibility for my financial undertakings. However I can categorically state, were it not for the Insatiable greed of the pubco-systsm, I would not have been made bankrupt. In a six-year period, I re-opened three previously closed premises, made Investment in all of them, allowed Enterprise to amass approx one million pounds In rent and trade, and yet I end up owing £100,000 to HMR&C. Why? Because of the greed of the pubco complicit in the knowledge that I had to use receipts of VAT and Revenue to support my cash flow and settle their account under threat of non-supply. I would wager that there Isn’t a failed tenant/lessee in the COUNTRY who did not go bust without owing VAT and/ or tax; having first suVered the duress to settle the account with their respective pubco. And It gets worse. . .. Having surrendered my final lease to Enterprise in March 2007, they immediately advertised it for sale on their website for £138,500. That was my only remaining asset. And enough to clear my tax liability! I left everything in the pub for a seamless handover to the new Incumbent, having agreed a paltry valuation of £13,000 for F&F. (The aforementioned Improvements were “claimed” by Enterprise and did not form any part of the valuation). Under protest, I did not sign a “departure statement”. In the week after my departure, they sent a fictitious Schedule of Dilapidations, un-priced, and it has taken me over 12 months to illicit the costs Involved. Surprise, surprise eight out of ten items were outstanding at the time I originally signed my lease. They did not see fit to provide me with the statutory notice of application to close a registered leasehold title; were they afraid the OYcial Receiver may have attempted to realize some value in it? I took, and paid for legal advice throughout my association with the pubco. On three occasions I paid for Surveyors’ reports relating to two of the premises. Those reports were ignored by the pubco. I remain convinced they only have one aim . . . to suck people in, often with no experience and let them learn by their mistakes. Sadly for them, the supply of “lambs to the slaughter” is now drying up. I believe six years is way above the average life of a current tenant/lessee, therefore I deduce I must have done something right. Indeed, I was a finalist In the Pub of the Year Awards In 2002, a regional finalist in the Perfect Stella promotion, and first In the UK for a Budweiser/World Cup promotion In 2006. However, each of the three “opportunities” managed by me over that six-year period, have now further changed hands AT LEAST TWICE since my departure. The real question that needs to be asked of the pubco is this. . ..

What constitutes a PUB closure? I took on three previously-failed businesses. Each one of those has now changed hands at least twice since. I make that 13 closures between three pubs in six years. (And how many of those were in debt to HMR&C?) Are they Intent on continuing to over-rent unviable premises? Will they ever adopt a fair and equitable means of assessing rent in a falling market? And will they EVER end the ubiquitous beer-tie? It is not the salvation of small brewers, as they claim, it is the ruination of many businesses, many dreams and many people. And as for the latest figures from BBPA claiming that pubs are closing 18 times faster than In 2005, now up to 36 per week . . . I haven’t even touched on the eVects of the Smoking Ban, Credit Crunch or cheap supermarket booze! 29 September 2008

Memorandum submitted anonymously I would like to recount my story and why I believe this demonstrates irrefutably that the tied-lease “Pubco” model is fundamentally unfair and is abused by the Pubcos. In six years of ownership we had never missed a weekly direct debit payment for our rent and beer order; because we are tied both of these payments were made by direct debit to our Pubco every week. We never “brought-out” or broke the terms of out lease in other respects. We spent a lot of money on the site improving it and meeting our “fully repairing” obligations. Our business plan was submitted to the Pubco before we took over the lease, and if an absence of any comment on the plan can denote approval, the business plan was approved. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Two weeks ago we missed our first direct debit payment in our entire time at the pub. We proposed a repayment plan that would have caught up the missed payment and placed the account back in order over a five week period. This was rejected because the Pubco has decided it doesn’t take cheques and because repayment plans had to be over four weeks. We were placed immediately on something called “cash with orders”. Moving to “Cash with orders” from a credit account is extremely onerous and places an enormous extra burden on an already struggling business. it means that; 1. Everything outstanding on our account became payable immediately. We were apparently treated with great leniency as we were given an extended period to repay this amount. It still amounts to a substantial additional sum we must pay every week on top of the rent and beer. 2. Rent payment is now due 9 to 15 days in advance. 3. Payment for rent, beer and arrears was moved from a Monday to a Friday, when the pub takes most of its money over the weekend. When I pointed this out, the problem was ignored and I was told that if we didn’t pay on Friday the matter would be referred immediately for legal action and that there would be a £47 charge added to our delivery because it would not take place on our “scheduled day” (which could not be moved). If we could not comply with the above (having been given virtually no prior warning or being oVered any flexibility over the conditions) legal process would begin immediately! I’d like to remind the reader of three facts here: 1. We’d missed one payment in six years. 2. We’d proposed a perfectly reasonable repayment plan which was rejected. 3. The Pubco had £12,000 of our cash on deposit with them. I was told by the Pubco that these terms of trading are contained in my lease they are not. They are also not shown on any of the invoices or statements ever received from the Pubco. The glossy “charter” the Pubco recently sent me mentions cash with orders but absolutely no details are given about what it involves. What can I do about this? Somehow in the space of less than two weeks we had gone from having a perfectly reasonable relationship with our Pubco to being on the point where legal action being taken against us. “Cash with orders” makes you feel like a criminal, someone who cannot be trusted, and someone because of the constraints of the beer tie who has no option but to go along with whatever the Pubco demands. The attitude of our Pubco immediately changed it is as though their aim now is to hound us out of business, collect on the insurance and benefit from the improvements we had made to the property. We are a business of just four employees, working 60–70 hour weeks each and without any recourse to specialist advice. The Pubco are a major FTSE listed business with, i imagine, huge resources of financial and legal advice. I would like to consult with a professional over this treatment but I cannot because I have no money to do so (that’s why we missed the direct debit payment). The mantra of “caveat emptor” is trotted out; “you signed the lease, you knew what you were getting into” to justify the situation (although, like I said above, I just can’t find where it says in my lease that this is what happens to you if you miss one payment). I have absolutely no choice but to try to battle through whatever payment and trading terms the Pubco throw at me. Without doing so they have the ultimate sanction, far more eVective and faster acting than taking the lease away; they simply stop supplying the pub with beer. We then have nothing to sell, the pub closes down, the rent is unpaid and the whole sorry saga starts again when the Pubco find their next victim lessee. The Pubco’s are nothing short of a consumer con-trick. They employ enormous marketing resources in convincing ordinary members of the public to sell up their houses, or borrow against their equity and start a glamorous new life running a shiny new pub with the support of a “paternal” Pubco partner. It must all be OK mustn’t it they saw our business plan and our area manger will be around to give us advice? And as soon as these ordinary members of the public cross that dotted line that means they become a “business” any regulatory protection they might have enjoyed as a member of the public disappears; same person, but you’ve signed a Pubco lease now. I am not advocating here that people should not face the consequences of their own decisions, but in the face of the powerful marketing machine that hauls ordinary people into the net, some will succumb and some of these will lose EVERYTHING. In our particular case we had a full valuation done by a RICS surveyor before we signed the lease and as mentioned above our business plan was approved by our new Pubco “partner”. The pub has won awards and I have stacks of positive customer surveys and questionnaires. We are much better than the competent operator benchmark the Pubcos and RICS use to set a fair maintainable rent against and yet we still cannot make ends meet. And what underpins the “con trick” being pulled by the Pubco on ordinary members of the public is that they insure themselves against the financial losses when a lessee surrenders or forfeits their lease. They can destroy lives and move on with their share price and results unaVected. I and all other lessees out there pay for this insurance, funding the safety net that allows the Pubco to treat us as “lambs to the slaughter”. So Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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when the executives of the Pubcos sit there in front of parliamentary committees, or explain to the press that really their business model works because “we’re more closely aligned to the objectives and success of our tenants” remember that the Pubco doesn’t lose out they’re insured. They reckon you should stand up to bullies but how can you when they not only hold the levers over the property you trade in but also the supply of the one thing you can’t do without..,beer? The relationship is so unequal in terms of size and resource that the lessee simply has no chance you accept the unacceptable treatment and put up with the harassment because otherwise you loose EVERYTHING. The beer tie is wrong because: The tied model allows this chronic abuse of corporate power and greed. The relationship between Pubco and lessee is already completely one-sided in terms of resource and expertise. The tie is the ultimate weapon in this unequal relationship. It allows Pubcos to ride rough shod over any normal and acceptable business practice. It amounts to nothing short of a mandate for corporate bullying and excessive greed at the expense of what are ordinary people at the end of the day. The tied model also greatly inflates the prices paid by the end consumer because tied sector prices are inflated by the Pubco’s insertion into the supply chain, retail prices across the whole sector are higher than they need to be for the end consumer. Remove the tie and you allow genuine competition to the benefit of the consumer and the industry as a whole. The Pubcos defence of the tied model is that their success and that of the lessee is aligned is a SHAM. They have insured themselves against “failure” paid for by the lessees themselves, Provided the marketing machine can still put new lessees on the conveyor belt and the insurance premiums don’t get too high “churn” is all part of the game . . . unless your one of the ones being churned in which case you lose the lot. The tied Pubco business model is an outrage, a small number of people loss everything because of it, the wider public pays too much for a pint, and society is steadily loosing a cornerstone of the community as smaller local pubs are squeezed out of business. 29 September 2008

Memorandum submitted by the Good Pub Guide We have for some years been concerned about the preponderant influence of the biggest pubcos. Indeed, we opened the Introduction to the new edition of The Good Pub Guide with these words: “The big pub companies or ‘pubcos’ which dominate Britain’s pub scene have taken a battering on the stock market in the past few months, seeing their share prices nose-dive. Shares in Punch, the biggest, lost over three-quarters of their value in the year to July. This was largely because of the huge amounts of money that the company had borrowed to pay for building its pub empire—over seven times the value of its annual income. Just like home-owners who had borrowed over seven times their salary to get their mortgage, then faced having to renew the mortgage when interest rates are going up, credit is in short supply, and property prices are falling, the over-borrowed pubcos are not in an enviable position.” We consider that the ultimate costs of what has in eVect been the re-creation, through securitisation, of these formerly brewery-owned pub chain monoliths bear all too steeply on consumers. Our impression is that both the higher-than-inflation increases in pub beer prices shown year after year by our annual surveys and the significant regional variations in pub drinks prices owe much to the influence of the biggest pubcos. 29 September 2008

Memorandum submitted by the OYce of Fair Trading

Summary 1. The Business and Enterprise Committee asked the OYce of Fair Trading (OFT) on 14 October to provide them with background information on the OFT’s activities in the beer and pub market for their follow-up inquiry into pub companies. 2. The OFT previously submitted evidence to the Trade and Industry Select Committee during its original inquiry in 2004. In both the evidence given to that Committee, and subsequent evaluations, the OFT concluded that, under the Competition Act 1998 (CA98) and Enterprise Act 2002 (EA02), there was no competition problem in relation to the beer and pub market. 3. The beer and pub market has been examined extensively by the Competition Commission and OFT. We have received no evidence or complaints that lead us to alter the position we submitted to the Trade and Industry Select Committee in 2004 that there is no significant competition problem in relation to the beer and pub market. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Introduction to the OFT 4. The OFT is a non-ministerial government department, originally established by statute in 1973 and subsequently transferred to a body corporate by the same name in 2003. The OFT’s mission is to make markets work well for consumers. Markets work well for consumers and contribute to the health of the wider economy when they are eYcient and productive. 5. As an independent professional organisation, the OFT plays a leading role in promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive. Our tools to carry out this work are the powers granted to the OFT under a wide range of consumer and competition legislation. 6. Competition law prohibits anti-competitive agreements and abuses of a dominant position. We can also carry out market studies and/or ask the Competition Commission to carry out a market investigation where we have reason to suspect that the structure of a market or the conduct of suppliers or customers is harming competition. We are also required to consider whether mergers will lead to a substantial lessening of competition. If that is the case we can refer them to the Competition Commission for investigation or seek suitable undertakings in lieu of such a reference. 7. In seeking to target both our resources and enforcement strategy, the OFT needs to consider a range of factors including impact on consumers, strategic significance, risks and resources. We also need to take account of the activity, capacity and interests of our partners. In October 2008 we set out eight principles for prioritising our work under the four headings of Impact, Strategic Significance, Risks and Resources. We will not apply the principles in a mechanical way: judgement and a reasoned balancing exercise are required for each case which necessitates that we consider the principles in the round and on a case-by-case basis. Where appropriate, we may also consider other relevant factors.

Investigations into Competition Concerns into the Beer Market 8. The beer and pub market has been examined comprehensively by competition authorities. 9. The beer market was referred to the (then) Monopolies and Mergers Commission (MMC) in August 1986. The MMC’s 1989 report was born out of competition concerns about the extent of the tie between brewers and pubs and led to the beer orders.53 10. The OFT reviewed the beer orders in 200054 and, because of the changes in the beer supply and pub market, made recommendations to remove most of the provisions in them. The OFT found the market generally to be competitive. Both Orders were revoked in 2003. 11. In 2004 the OFT submitted evidence to the Trade and Industry Select Committee55.Inthe submission, the OFT noted that the European Commission and European Courts had considered in detail tied pub tenancy arrangements as operated in the UK. We concluded that the prohibition under Chapter I of CA98 of anti-competitive agreements (which is closely modelled on the equivalent prohibition under EC law) was not engaged and that there was no case for action under the market investigation provisions of the EA02. 12. In 2005 the Competition Commission blocked SEDL’s takeover of Coors’ technical services and equipment assets. In doing so, it suggested that the OFT should consider making a market investigation reference (MIR) to the Competition Commission of the supply of beer to retail outlets. 13. The OFT examined the case for a MIR of technical services and technical services equipment and the case for a MIR of the wider supply of beer sector. 14. The OFT found that a narrow market focus could not be justified because: — there was inconclusive evidence of the presence of features which prevented, restricted, or distorted competition in connection with the supply of technical services equipment; — no complaints from third party technical services providers had been received; and — the scale of detriment in this aspect of the market was small. 15. The OFT also found that a wider market investigation could not be justified. We had examined the tied pub system in 2004 (see above) and examined the market for the distribution of draught beer as part of the assessment of the Interbrew/TradeTeam takeover in 2002 (which the OFT did not refer to the Competition Commission). 16. The OFT continues to examine beer and pub markets within its general duty to consider mergers in all sectors. For example, recent cases in this market include Punch/Avebury Holdings (2005), Greene King/ Hardys and Hansons (2006) and Punch/Spirit (2006).56 We are currently evaluating the anticipated acquisition by Inbev N.V/S.A of the Anheuser-Busch Companies Inc.

53 See the beer orders at http://www.opsi.gov.uk/si/si1989/Uksi 19892390 en 1.htm and http://www.opsi.gov.uk/si/si1989/ Uksi 19892258 en 1.htm 54 See the Supply of Beer (OFT 317—December 2000) at http://www.oft.gov.uk/shared oft/reports/comp policy/oft317.pdf 55 See http://www.publications.parliament.uk/pa/cm200405/cmselect/cmtrdind/128/128ii.pdf, Volume I, at “Ev232” 56 See www.oft.gov.uk for all OFT decisions on mergers within the beer and pub market. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Conclusion

17. The beer and pub market has been examined extensively by the Competition Commission, the European Commission and OFT. We have received no evidence or complaints that lead us to alter the position we adopted before the Trade and Industry Select Committee in 2004 that there is no significant competition problem in relation to the beer and pub market. 12 November 2008

Memorandum submitted by the Licensed Trade Charity We receive over 250 calls a year from licensees struggling with their pub and asking for guidance and in many cases support to help them eg to find accommodation. The Welfare Dept do not keep a record, but can confidently say that the majority are from lessees of pub companies. We have seen a very significant increase in the number of people asking for help, of working age and struggling with their pub. However, as we have increased awareness of the support we oVer, we cannot say that this increase is due to a change in the marketplace situation or as a result of this increased profile. As a priority we encourage the lessee to talk to their landlord to help resolve their situation. Both Punch and Enterprise have provided us with names of people within their organisation that can be contacted if the lessee finds the response from their local contact/regional manager unsatisfactory. To assist with the increase in calls regarding business problems, we will be trialling a new service where the licensee could qualify for a mentor to visit their pub to help facilitate their thinking on where to go forward. Again, this would be after they had exhausted an attempt to resolve the situation with their pub co and would not be with the objective of providing advise. We are not a campaigning organisation. Our objective is to look after the welfare of the individuals working in the trade and their families. We do not provide any business guidance to those calling us. We may refer them on to specialist helpliness eg debt line.

Memorandum submitted by David Law, The Eagle Ale House I am a Partner in two pubs leased from Enterprise Inns. My business partner at the Eagle, 104 Chatham Road has entered evidence to the BEC with regard to Rent Reviews, Code of Conduct, The Tie, and many issues that I am sure will be well supported by many other submissions. The issue that I would like to address is in my view a sharp and shoddy practice employed by Enterprise Inns and many other PubCo’s which I consider to be fraud and within the remit of the Serious Fraud Squad. The issue is the use of a beer monitoring system that put simply counts the volume of beer dispensed in a tied pub. The PubCos use of this system is to supposedly check whether the Lessee is buying beer on the free market “outside of the Tie aggreement ie, if the system counts more beer dispensed than has been bought by the Lessee from the PubCo, he is assumed to have bought beer elsewhere. This system is known as Brulines and was founded by Derrick Collins who in 1986 was convicted of conspiracy and blackmail: http://www.telegraph.co.uk/finance/2720480/How-to-ride-a-company%27s-growth-cycle- without-falling-oV.html The system is based around a very simple flow meter commonly used in plumbing and can be bought over the counter in any plumbers merchant for approx 24p. It measures each half pint dispensed and the info it records is then transmitted by a digital signal to the Brulines centre and is then checked against deliveries manually entered from data sent by the PubCo. The problem lies in the fact that the analysts of the data at the Brulines HQ have to guestimate the quantities of water that the Lessee pulls through the dispense system to clean the beer pipes because the meter cannot tell the diVerence between beer or water. If they don’t get this right(they often don’t, and in our case I know that they haven’t a clue) it is counted as beer volume and so the Lessee is therefore already falling foul of the system by performing best practise. By law beer pipes have to be cleaned once a week, however, with regard to real ale we clean our lines at the end of every barrel. This had accounted for a massive discrepancy in the figures for our site. My first experience of this was when my BDM reported a 54 x 11 gallon, barrels discrepancy to my previous employers at the Eagle, and asked them to explain it. Both Directors the stocktaker and I could not prove the figures to be incorrect other than a couple of barrels diVerence. When one of the Directors asked the BDM what would happen if the discrepancy could not be accounted for he replied that an £8,000 fine would be levied to them. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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The Directors were obviously unhappy about this and were considering that I was buying in and selling my own beer through their outlet, and one might reasonably reach this conclusion if one were to believe the figures quoted. I however had a good idea of how the system worked and stood my ground as my livelihood and home were potentially at risk, not to mention the £125,000 deal that I was brokering with the Directors to buy the lease from them. Subsequently I was vindicated by an Email sent by Brulines admitting their mistake was due to missing delivery figures and incorrect guestimation of beer line cleaning. See below Bruline e-mail. E-mail to The Eagle from the Accounts Manager,Brulines, dated 28 July 2005 Further to our conversation today, as discussed we have investigated the variances on cask ales at the Eagle in full. There appear to be two reasons for the variance, firstly we missed 153 gallons of deliveries on specialist cask ales, due to the manual nature of how these are input into our system. We have rectified the error and will ensure it does not happen again. Secondly, it is testament to the quality the cask ale oVering at your site, that your manager has such high standards with regards to the care of cask ales. The level of line cleaning and “flushig through” that your manager undertakes is very high compared to most outlets. With the level of care being taken over cask ales, we have now taken into account fully this flushing through using a bucket. Having now identified this, we have removed dispense information from the cask ale lines for flush- through and will take this ino account in future. This admission however, did not stop the BDM from trying the same thing on two other occasions after this. Brulines latterly acknowledged they did not consider the Eagle to be guilty of any impropriety. Our figures as per Brulines are now contrary to that period in that in the year commencing 30 June 2007 to 29 June 2008 the stats show: Delivered 12,929.8 gallons Dispensed 11,443.1 gallons A variance of 1486.7 gallons or 135 x 11 gallon barrels. Unfortunately I personally know four Lessees that have been charged with the same accusation and sadly paid fines of £1,500, £3,000, £4,000, £8,000 and another with an attempt at £18,000. Why do they pay if they are not guilty? Put simply many are too intimidated by the power and might of the PubCo, and their common threat to forfeit the lease in court. The lessee will on average have a £10k deposit with the PubCo, £5,000 stock holding, £20,000 refurbishment and maintenance investment, £6,000 Fixtures and Fittings, £30,000 premium investment, equalling £71,000. Being presented with fancy spreadsheets they don’t understand, the threat of court action from a £5 billion net worth PubCo and potentially losing one’s home and livelihood, I can understand and appreciate why a £3,000 fine would seem like even where you know your innocence. Consider this scenario; the two largest PubCos have between them approaching 16,000 pubs 28% of the UK’s Pub Sector. If they achieve a levied fine of only £1,500 to half of those the pubs in their estates the revenue stream would equate to £12,000,000. Hardly small beer! Enterprise Code of Conduct; “Central to our business strategy is our commitment to developing a mutually profitable relationship with our business partners. Such a relationship requires trust, understanding, clarity and focus”. Nick Light Operations Director, Enterprise Inns told us that Brulines had gone to court 160 times and had a 100% track record. This is a part truth, as far as I am aware at this moment in time they have not won a forfeit to lease on a first attempt as the Judge reasonably asks if the equipment has been recalibrated. Our experience shows that it is not. Any meter that is suspected of being faulty is just thrown away and replaced, without the Lessee being given a chance to inspect the faulty apparatus. What Mr Light refers to are injunctions to stop a Lessee buying out of the Tie. Well if one knows he is not “Buying Out” why would one be bothered by an injunction stopping one from doing so? Thus they go uncontested: http://www.thepublican.com/story.asp?storyCode%53272 Recently we had new meters installed and the variance started to drop dramatically. When we questioned this the figures were immediately reversed. This is very disconcerting as no eVort was made to check our claim it was just honoured without any site visit, re calibration or stock count. Hardly Scientific! Enterprise Quote on Brulines: “This equipment provides a wide range of information to aid quality and management control, which can help you run your business move eYciently. Stock control and checks on whether beer taps are working eYciently are just two of the benefits”. How? The meters aren’t government stamped, are not recognised by Weights and Measures or Trading Standards. Flow meters are used by the oil trade and are notorious for inaccuracy, which is why they are recalibrated weekly. Oil Companies use very sophisticated expensive kit. Our Brulines meters have had their calibration checked just three times in three years. Processed: 08-05-2009 02:36:00 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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I am willing to be called as a witness for the BEC and have copious amounts of further information to support my claim. September 2008

Memorandum submitted by Dovedale Towers I attach a small piece below. We thought a moment about this, knowing they would try and make life even harder for us as a result of us submitting the piece, but then realised they couldn’t make it any worse. I will outline the main headlines. We do know that during this process it would appear that we have made mistakes. When we spent money on the place for example we should have sat down more forcefully with them to negotiate, but we did try.Any attempts to do that took ages with Enterprise and we didn’t have ages.

Dovedale Towers

We bought the business in July 2007. We acknowledge that we were not hot on the schedule of dilapidations and other legal matters at the time. We actually spent £9,000 prior to acquiring the place, madness I know, to have the first floor refitted as conference and training rooms. Enterprise have a £10,000 deposit of ours. Unbeknown to us the previous trading figures were heavily dependent on trading after hours. The main drag near-by, Allerton Road, shuts at 12 and Dovedale was the late drinking den that everyone headed to. Locals were up in arms about the noise just after 12am as people arrived and then again between two and three as they departed generally much the worse for wear. The previous owners had told them very bluntly what they could do with their complaints. On 24 August 2007 two people were shot on the doorstep, both surviving, and trade fell oV dramatically. We spent nearly £20,000 on setting up a new restaurant/bar concept called Lief, which in hindsight was clearly too “fancy” for the local community and within a few months we were down-grading it to a pub, this time spending a couple of thousand. Locals said they were very happy with that but trade was still about half breakeven. We have recently had another company try and assign the lease oV us. We were told that we would have to pay for dilapidations work to be done (on items that were in exactly the same state of repair when we took over). This immediately looked like them trying to get money oV us so that we would never get our deposit back. I wrote saying that and was told that was not the case. Enterprise would not listen to our request for them to take a view on dilaps because of the money (circa £30,000 not including own labour) we had spent transforming the building. At the same time we then received threatening letters asking us for £8,000 for trading out. I simply saw this as more eVorts to hold on to our deposit so I stopped the dd suspecting that they would simply start taking our money. Within a matter of days there was a bailiV here and talking openly about why in front of staV and customers while counting our chairs. We do suspect that the previous manager may have done some trading out, in error rather than for personal gain. With the dilapidations and the legal fees we spent over £7,500 on the aborted sale, again excluding own labour. We have had no assistance with the business at all from Enterprise. We think a double shooting on the doorstep is what we would deem extraordinary circumstances and yet they are totally uninterested. They told us a month ago that we would be able to buy out for £10,000 to £20,000 and they have since added that is only if we have a new assignee lined up. If we had a new assignee why would we pay any money? They also told us that rent was based on rateable value and on trade. We sent them the trade figures showing the horrendous downturn and details of a rateable value reduction we have been able to arrange. They now tell us that this does not merit a reduction in rent. The rent is £47,000 per annum including all the add ons. In the past three weeks we have worked flat out to try and get a plan together for next year that will make enough to break even and have sent that plan with a request for assistance to Enterprise. We think the pace can be turned around but need assistance as the new initiatives build up. When this is shortly refused, I will then be inviting them to come along and collect the keys and sue myself and my fellow Directors for our guarantees. That is the last straw obviously but without help it is a cheaper option. I am unable to borrow any more money personally and Enterprise collect their rent without break. We make about 49% GP on the site and could buy everything cheaper in the local supermarket. We currently take about £4,800 a week and our fixed overheads are £3,200. Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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This grand old building has some great history. The Quarrymen played here in 1957 after John Lennon had joined them. It could be a good business but without a partner it can’t work. 8 December 2008

Memorandum submitted by The Royal Oak I wrote to say that, having listened to evidence from Enterprise to the Committee, I refute absolutely their claim that they provide benefits to tenants which compensate for the increased costs of purchases. Mr. Tuppen even claimed that “property reviews” are a benefit. In fact they are conducted solely for the purpose of ensuring that the tenant is compliant with the repairing and redecorating covenants in the lease. I also deny there is any business assistance from Regional Managers or Business Development Managers (BDMs). Their function is principally to carry out administrative tasks, and to conduct rent reviews. I have been an Enterprise tenant for over 12 years, and have never received any assistance with business development from any Enterprise employee. I have received no training. I did try to use their free rating advice but I had previously negotiated a rates reduction, and was told that if anything my rates were too low. I was most surprised that the TISC took the view that there are benefits, and that these compensate in some way for the costs of the tie. I hope you will have the good sense to take a diVerent view. If tenants were oVered a specific reduction in their rent to compensate for the loss of these benefits, and given the opportunity to buy into them, I do not know of one tenant (and I know quite a few) who would buy into the benefits at any cost. Nor do I know one tenant who would not opt out of both benefits and tie given the option. Could you perhaps ask Enterprise to give tenants the opportunity to choose?

Letter submitted by Robert Milroy I would just like to let you know of my experience with Enterprise Inns. I took over a pub in South Wales in May 2007, when I signed the lease I was promised the earth, I was told the pub was taking between £5,000 and £5,500 per week, after two weeks I still hadn’t reached that target. I spoke to the area manager on several occasions and his answer was “it’s up to you to build it back up”. It took them over five months to get the kitchen up to safety regulations standards for me to trade in it. My working day then became 18 hours per day between working kitchen and bar and still only managed takings of £3,500. By this time rent had risen to £3,600 which was 25% of the monthly takings and beer orders costing more than 50%. Now six months into the lease bills were starting to accumulate and Enterprise saying basically it was down to me as I was the one who signed the lease and oVered very little help whatsoever. Things are beginning to get even worse with winter approaching, every heavy downpour the pub leaked like a sieve, Enterprise inns answers to this was read paragraph ** of your lease, it states I am now responsible for all repairs. Not long after this I had no alternative but to post the keys back to Enterprise Inns, completely broke. January 2009

Memorandum submitted by Gareth Thomas MP, Parliamentary Under-Secretary of State for Trade and Consumer AVairs, BERR I am writing to confirm that BERR does not intend to lodge evidence with the Committee in its follow up inquiry into pubcos. I understand that this message has been relayed informally to you via BERR’s parliamentary branch. I am aware of the Committee’s work and have followed developments since the announced launch of the inquiry on 25 June. BERR has not submitted written evidence during the period to 29 September. At this stage I believe that the parties who are involved in the sector are best placed to provide evidence on how the market is working. I look forward to reading the final report. 8 November 2008 Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Memorandum submitted by Lisa Smith I am talking about the prices that are charged by Enterprise Inns for their SIBA DDS scheme. I received my letter (dated 16 February 2009) on 24 February 2009 stating that prices will be rising as from Monday 16 February 2009!! The increase is in eVect approx 5.18% per 9 gal cask or approximately £4.50. (Price list and letter attached). On talking to one of the ladies at SIBA it was acknowledged that Enterprise Inns has increased the amount they are paying to the brewer by 3%. I would be interested to know where the other 2.2% is going and in the current economic climate was this an acceptable increase to the publican. I have no problem with brewers receiving proper payment for their products as they are time consuming to make and done so with loving care and attention. However, as they are receiving less than their lowest price to the free trade, I feel that there can only be problems on the horizon. On speaking to a couple of brewers the diVerence between what I pay and they receive is approx. £30 per 9 gal. This money is not staying within the industry but going straight to the middleman. I did 522 diVerent ales last year (mostly from the SIBA schemes) so this equates to £15,660 lost to both the brewers and ourselves. Most importantly if this amount is split equally then this equates to a 20p price decrease for the end consumer, the customer. These new prices have eVectively priced us out of the market where local ales are concerned. We were planning on having a local ale as a regular but to make 45%GP on a 3.7% we would have to charge £2.70. Our nearest real ale pubs are selling local beer at considerably less than this (they are not tied to any of the big Pub Companies) and obviously JDW is selling beer at much less than £2 a pint. We do not want to compete with JDW, however the diVerence is now so pronounced that the customer is voting with their wallets and feet. We are eVectively being put out of business in a slow and painful way because if we do not raise our prices we will not have enough money to pay the bills (rent, gas, elec, licences etc) and if we do raise them then people either spend less or stop coming in therefore turnover decreases and not enough money to pay the bills. We are a CAMRA award winning pub and in the Good Beer Guide for the last four years. Apart from one year in our 10 years here, we have increased trade year on year, so we must be doing something right!!! However, the diVerence now between free trade and tied has now become unacceptable. That someone can make approx £30 for doing nothing is outrageous. There are many reasons why the pub trade is in decline, government legislation, taxation, social issues, supermarkets and oV-licences and the smoking ban. However in our opinion the one that is overlooked the most is the pricing policies of the pub companies. Yes we signed a legally binding contract but I didn’t sign up to massive price increases year on year. The diVerence now on some products is as much as £50, where as when we started just over ten years ago it was £10–£15. This diVerence is only going to the middleman who contribute nothing to the actual pub going experience. 27 February 2009

Memorandum submitted by HMRC Board London All non-domestic properties are revalued by the VOA every five years. The last revaluation was eVective from 1 April 2005 with a base valuation date of 1 April 2003. A revaluation is currently underway and will be eVective from 1 April 2010 with a base valuation date of 1 April 2008. The basis of valuation is rateable value, which represents the VO’s estimate of the rental value of the property as at the relevant valuation date. When considering the valuation of pubs and other leisure properties, in addition to rental data, the VO usually needs to request information about the business, such as trading receipts, in order to be able to gain an understanding of the level of fair maintainable trade. This is a factor that influences rental values that businesses pay to property owners and so also aVects rateable values in these property classes. Rental value still underlies the basis so it is possible for individual pub occupiers to reflect on the correspondence of the rent they are paying and the rateable value that has been assessed. However, there are certain factors that need to be considered when doing this since it is quite possible that the basis of the rent is at variance with the assumptions used for the purposes of determining rateable value (RV): (1) For rating an open market lease is assumed, free of any tie in respect of liquor products supplied by the landlord. The majority of pubco leases are subject to a tie of some degree or another. In theory the rent passing should be reduced to reflect this restriction on the publican’s business model. (2) RVs assume a lease under which the tenant is responsible for all repairs and property insurance— the actual lease may be on the basis that the landlord covers all or part of these, and if so, the rent will be proportionately higher. Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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(3) RVs relate to the value of the non-domestic part of the property only (ie living accommodation is excluded). Most pubs are rented with the living accommodation above included. (4) RVs depend on the accuracy of the trading data in the possession of the VO. Forms of return requesting up-to-date trade are sent to every occupier in advance of each Reval, although many are not returned in part due to rapid changes in the occupation of some pubs. (5) RVs relate to a single valuation date on a five-year cycle, the rent may be out of step with this. With the 2010 revaluation, for the first time, the VO will be sending individual pubs the breakdown of their rateable value assessments. This will be done six months before the values come into eVect in order to give people the opportunity to check the details held and raise any queries if necessary. The intention is for everyone to be assured that their rateable value is accurate and that they have been treated fairly. Whilst it is not possible to release confidential taxpayer details, information on the rateable value of individual properties is available on the VOA website at www.voa.gov.uk by entering the relevant postcode. In addition, HMRC analyse the VOA data and publish aggregates as National Statistics on the HMRC website http://www.hmrc.gov.uk/stats/non domestic/menu.htm. As of the beginning of April 2000 there were 61,000 pubs and wine bars in England and Wales with an aggregate rateable value of £1,311 million. As of the beginning of April 2005 there were 66,000 pubs and wine bars with an aggregate rateable value of £1,667 million. Comparisons with rental trends over time are problematic as these need to reflect the diVerent characteristics of the pubs being considered, as well as the impact of other factors aVecting individual pubs between revaluations, such as increased competition, refurbishment, etc. 11 March 2009

Memorandum submitted by Chris Swift In the days when brewers owned pubs there was perhaps a need for the “beer tie”, it was a mechanism that provided a market for the brewer with the tenant benefiting from subsidised rents. In reality there was little diVerence between the wholesale price for the “tied trade” and for the “free trade”. As a tenant licensee in 1985 I was able to sell beer at under a pound a pint, the brewery maintained the building and my rent was considerably lower. I could happily operate on a 38–40% gross profit percentage. An EU directive meant that for a small addition to my rent I could be freed from the wine and spirit tie. I could buy my minerals, snacks, cider and sundries anywhere I wanted. After the implementation of the Beer Orders I enjoyed the freedom of a guest beer. The Beer Orders pushed the brewers with over two thousand houses to sell them and concentrate on brewing. The large PubCos were created out of this with the two major companies eventually each owning in excess of seven thousand units. Not classed as brewers, fully repairing leases became the norm, rents increased many fold to “market rents” and gradually the “tie” was strengthened to cover not only all products but even services. The PubCos now were in a position to not only control the supply but to dictate the price charged. Brewery price increases became much larger than previously seen. As cost prices increased the discount demanded by the PubCos increased and I am sure that these discounts have merely added to the massive cost price hikes that we have seen over the past few years in particular. The cavalier approach to price increases can best be seen in the latest increase where for instance Enterprise wrote to their licensees stating clearly that “prices would increase by an average of 6%”. One of my clients has Theakstons Bitter as his best seller. On 11 February a cask containing 11 gallons would have cost him £103.22 but a week later, on 18 February that same cask would have been charged at £113.99—an increase of £10.77 or 10.43%. This would amount to an amazing £35.25 per brewers barrel. Prior to the increase he was charging £2.55 which resulted in a 47.1% Gross Profit. This is lower than his target GP% of 50% but he feels it is all that the market will stand. As a rule of thumb for every £2.50 the cost of a barrel of beer increases two pence needs to be added to the selling price. In this case an increase of at least 27p–28p would be needed merely to maintain margins. The same beer direct from the brewery has a list price of £110.32 according to their February 2009 price list. How Enterprise can justify charging more than the brewer is diYcult to ascertain particularly as few licencees will pay the list price—one of my true “free trade” accounts pays just £57.15 for the same beer. The amount of discount obtained by the PubCos is a closely guarded secret but in view of the level of damages they see fit to charge, when licensees buy from a local wholesaler, a figure of £180–£220 would probably be conservative. Another of my clients attempting to prepare a business plan was oVered a discount of some £75 per brewers barrel. This was probably 40% what the PubCo received but would have meant a cost reduction to him of around £48,000 per year. It is the public house that makes the sale, earns the discount but it is the PubCo that retains the discount—that cannot be correct. I accept that the PubCo can often negotiate much better discounts than individual accounts but a significant part of that discount should benefit the licensee. For the brewer oVering much lower rents and taking on repair obligations there may well be a case for retaining the tie, but lets have the transparency of the “wet rent” been seen in the rent calculations. Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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At a time when the future of “The Great British Pub” is under threat I feel it necessitates the need for a detailed scrutiny of the “tie”, what exactly it is, why is it needed and who does it serve? In conclusion I would point that should I want to rent an oYce I would not then expect my landlord to insist that I buy all my oYce supplies from him at inflated prices—why then has the “tie” been allowed to thrive in this industry? 19 March 2009

Memorandum submitted by the All Party Parliamentary Save the Pub Group

The Key Issues to Address 1. The market dominance of the huge Pubcos. 2. The supply tie or “wet rent”. 3. Rent. 4. Problem with access to market for smaller (inc. more local) breweries which restricts customer choice. 5. Restrictive covenants. 6. Automatic right to buy for lessees and for communities.

Introduction The Save the Pub Group is extremely concerned about the way the tied tenancy model is currently being operated. The situation has transformed since 2004 and last select committee report and we are delighted that the committee are looking at this again, and in depth. The way some of the large companies (non brewing pub companies in the main, but not solely limited to them) have skewed the tie has meant that the leased model, as currently operated, is a problem in itself. All this arrangement has created is a band of demotivated tenants. A little like the situation in some banks, who succumbed to greed during the good times, the tenant model has been skewed through greed and self- interest. There are many examples of excellent, well run pubs, doing well with great “footfall” and good turnover, yet barely struggling to break even because the rent is punitively high and they are charged such high prices for beer. There is also strong evidence to show that some companies are continuing to raise tied beer prices and rents in the recession, and in some cases above the rate of inflation, in order to service their very large level of debts. This is forcing many of their tenants, each and every one a small business, out of business. We have been contacted by licensees from up and down and country regarding this issue, and whilst we share concerns over high levels of beer duty, prices in supermarkets, regulation and planning, we do think that the way “the tie” is currently being operated by some companies is a very serious issue and one that needs urgent reform. Without dealing with this, the very real and very serious situation facing the British pub will not be addressed. The current situation is not good for licensees, pub customers, and indeed is leading directly to the closure of pubs. It is therefore in itself a threat to the future of the British pub and the community pub in particular (the majority of community pubs are owned by a few companies), and needs urgent and radical reform. The current code of practice has been an abject failure. It is clear where the blame lies for the skewing of the tied system that has led to the abuse of this relationship, so expecting these companies to regulate themselves on this issue is unacceptable. Legislative change, including a mandatory and enforceable code of conduct, is essential. Many of the arguments in defence of the current operation of the tie simply don’t stack-up; they are not backed up by evidence and in some cases are now absurd. It is extraordinary that some companies and associations continue to suggest that the tied model as operated is in the interests of tenants. In far too many cases clearly the opposite is the case. Even the argument that the tenancy model oVers a “low cost entry” into the sector is now deeply flawed. There is considerable evidence that many tenants are being oVered tenancies when they do not have the knowledge or understanding of the very serious, binding, and long term legal contract they are entering into, and often have clearly not been vetted suYciently as to whether they are really suitable to run pubs. This is a covert form of exploitation and leads to the unfortunately all too common cases of human misery, indeed sometimes tragedy, which is caused when these small businesses fail—often when people have ploughed thousands of pounds of their own money into the failing business including mortgages and savings. To suggest that this outcome is ‘low cost’ to these individuals is bitterly ironic. Although the remit of the committee is business and enterprise, in this particular situation, the multitude of tales of human misery, of people losing savings, houses, simply cannot be ignored. This is not only a business issue, or even one about the historic public house, nor even about communities. On this level, this is a moral issue that must be tackled by Government. Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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The fact that the pub companies have not been prepared to publish figures on “churn” is very revealing. Most changes of tenant represent the failure of a small business, very often following an acrimonious dispute with the pub company or brewery. This cannot be ignored. To suggest, as some companies have done, that there are more free of tie pubs closing than tied ones is as dishonest as it is absurd. It is also notable that despite complaining about the very diYcult trading conditions pubs are in and problems with high beer duty and supermarket pricing, it is the large companies themselves that are closing the vast majority of pubs that are closing nationally—often, even when the pub could be viable in other hands. This is a serious threat to the future of the British pub, coming from companies in trouble who are having to service debts and answer to shareholders. This cannot be a defining reason for closing hundreds of pubs and unless action is taken, it will be. It is notable that some companies (some in particular!) are finding it harder and harder to find people willing to take on tenancies so are resorting to installing management companies. There is also the concern that were property prices higher, companies would be much more willing to cash in for alternative use. Ironically, it could well be that the recession is saving many pubs from permanent closure simply because sale for change of use is currently not realistic in the current climate. This means that this is an issue that must be resolved before the recession ends, or we could see wholesale disposal of pubs by companies who can make short term gain by selling them.

The Key Issues and Solutions

1. The market dominance of the huge Pubcos

No-one likes regulation of markets unless it is necessary, but the dominance of large companies and the way some of them have skewed the tied system so hugely in favour of the property owning company and against the small business people actually operating the business is a source of fundamental concern. The Save the Pub Group believes that this situation should be looked at again. The Beer Orders distorted the pub market the other way round by restricting the large brewers, and in the process establishing huge and dominant non-brewing pub owning companies. The dominance of a few companies is not in the interests of anyone, and worst of all, it is now causing pubs to close that should not close and that could be viable in the hands of another operator or indeed the local community. Indeed there is much more justification for the use of tie by companies who brew beer than those who do not. Smaller breweries supplying their own pubs with a range of beer. So a reverse beer orders could even be considered, whereby the supply tie is abolished for all stand alone pubcos but allowed for breweries up to a limit (suggested no more than 500 pubs). The idea as proposed by some organisations that any brewery owing more than 500 pubs would have to allow at least one, or maybe two beers outside of the tie, is worthily of consideration here. It was a correct conclusion in the 1980s that the dominance of a few companies was not good for customers. So it is right to conclude that this is the case now, just with diVerent sorts of companies. The Save the Pub Group believes that similar reform should be considered. The ‘Beer Orders mark 2’ or shall we say, the ‘Pub Orders’ to stop the dominance of a few companies and what appears to be the ’cartelisation’ of the market. The Save the Pub Group does not say what an appropriate maximum number of pubs to own should be. However, we do start from the premise that if 2,000 pubs in the hands of a single brewing company was a bad thing for pub customers and the market, then more than 2,000 in hands of any company is bad for the market and for pub customers. 2,000 was deemed too many pubs for any brewer to have, at a time when there are more pubs than there are currently (Number of pubs estimated before beer orders 78,598 (figure from 1986), current number approx 56,000). So 2,000 now is a notably larger share of the market than it was when the Beer Orders were introduced. The distinction between brewing and non brewing companies is arbitrary and whilst the original intention behind the beer orders was to give more choice to consumers it completely failed to predict the slewing eVect of huge non brewing pub companies. It is time to address that. So “Pub Orders” could restrict the number of pubs that can be owned by any one company and with strict and detailed clauses that prevent company linkage, unfair supply linkages/agreements. It should also be devised to ensure and generate access to smaller local beer producers and prevent the dominance of the market by larger brewers. We want to stress that this in itself would NOT deal with the tie as operated and abused by some companies, so other measures would also have to be introduced. One unfair tenant agreement is not acceptable. But this move would oVer more choice to licensees of companies with whom to take tenancies, and would prevent the domination of the sector which is not good for customers, tenants or most brewers. It is crucial, however, that if ANY tied pub must be operated, then there needs to be major reform to the tie, if it is to remain for any number of pubs and for any length of time. Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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The Save the Pub Group also believes that regional and local restrictions should be considered so that a few companies cannot dominate all the pubs in a particular region or town/village. It is not healthy where two or three companies own all the pubs in one area, this is not real competition. So it is suggested that consideration of the Pub Orders should include this. We do also, however, share concerns that a change in ownership could lead to disposal of pubs by companies seeking to cash in on their value rather than sell to another operator. With the current scandalously weak position of pubs in planning law, treated simply as any other business except in certain extreme cases, this is a concern. This is why it is so essential that planning law is reformed to “enshrine” the public house in planning law, giving communities a right of statuary consultation whenever a pub is closed and including a mandatory viability test. It is also important to introduce the right to buy for sitting tenants and communities (see below).

2. The supply tie

Perhaps the biggest concern, and certainly the biggest cause of disquiet amongst licensees is “the wet rent” ie the inflated prices that tied tenants have to pay for their beer. The tied tenancy mode is supposed to be a relation of business partnership. It is no longer so in too many cases. In a genuine business partnership, the costs of product would be devised to enable the smaller business to succeed. The Save the Pub Group is very concerned to see the way some companies have increased the prices to tenants, including in many cases at rates above the rate of inflation. Despite securing huge discounts from brewers (often discounts that are on the verge of making the brewing of beer unviable), these are not passed on to the tenants. It is very notable that Wetherspoons, who also have considerable buying power, have chosen to pass on the discount they gain from brewers (it is also notable that Wetherspoons do have a real commitment to genuinely local, microbreweries who find it very diYcult to get into many pubcos pubs). This means the way the tie is operated is not good for pub customers who find they have to pay notably more for beer (which of course makes these pubs less attractive to customers and this reduces business, threatening these pubs viability). So the tie as operated by the big pubcos is one of the most serious threats to pubs. However, even when operated by brewers large or small, the tie has to be fair, and be a genuine and realistic business relationship. So we wish to ask is it really fair or right for any company to charge considerably higher prices for their own beer than they sell it to the free house next door? This seems a very odd business model and can only possibly be justified if balanced by notably lower rents and real business support. The supply tied system can only be justified if the rent is genuinely and demonstrably lower to balance this. The conclusion of this, however, is surely therefore that two agreements should really sit side by side, one rent only, one reduced rent and supply tie on beer. Without having this comparison, we only have tie pub owner/property landlord’s word for it that the rent is lower than it would otherwise be. There must therefore be a strong argument for making these two models optional and a decision for the tenant. That way either would have to be fair and transparent. If the tie is as much in the interests of tenants as the big companies like to suggest, then they surely have nothing to fear from oVering a diVerent business relationship, as if the tied system is so good, nearly all tenants would sign up to it! This is particularly true when you consider that the owner also has the option of operating the pub as a managed pub. If an owner does not believe a pub can succeed as a managed pub then does this mean that the pub actually is not viable under the tenanted modal they operate and if so is it right to oVer a tenancy? There could also be system whereby a supply tie agreement is subject to an option for either party to break the agreement after three years, subject to giving six months notice in writing. This would prevent people being tied into a business relationship that is not viable and can only lead to business and personal failure, which is too often the case with longer term leases. In the short term, and because reform is so urgent, the committee/Government should consider a policy which allows one or two beers to be bought out of tie. This in itself likely to have some eVect on high prices, if some albeit very limited competition encourage licensee to try to sell as much of that beer as possible unless price of others also reduced. One of the arguments in defence of the tie include not wanting to damage smaller, regional breweries, a point that we take seriously. However, we are concerned that we have seen no examples of how companies, smaller brewers or otherwise, are operating “the tie” in a fairer way that allows their tenants to make a living as well as selling their beer. We also believe that action should be taken, as quickly as possible, to regulate the price that pub companies can charge lessees for tied products. Presumably this would be as a result of action by the OFT. Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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We also believe there is clear and pressing need to regulate the outrageous system of fines operated by some companies. The system of self-imposed fines as operated by the big pubcos (£1,300 for every charge of buying out, even when the pubco were not able to supply beer needed by the pub, plus £300 legal fees) without any right to an independent appeal, is a disgrace and must be challenged. It is questionable whether this is actually legal in British and European law. It certainly shouldn’t be. There is also clear evidence of examples of where the Brulines system is not accurate. This means that people who have never bought out of tie have been fined and have no right to challenge this. This is appalling.

3. Rent The current rent calculation takes no account of the revenue lost to lessees as a result of being unable to buy beer in the free market. This is wrong and should be changed. Whilst upward only rent increases may have gone (one of the few recommendations from the 2004 report) they have been replaced by annual RPI rent increase regardless of trading conditions experienced by lessees. These are similarly unfair and should be ended. There is real concern about the level of rent and whether they actually allow the tenant (the small business person/people) to make a living (as shown clearly in the Morgan Stanley report). The Save the Pub group supports the idea that all tenancies should ensure that rents are charged at a level to ensure that tenants can earn a wage not less than the National Minimum Wage, including any adjustments for living in and holiday pay. This would prevent some of the rent levels that are unsustainable preventing people from making a living. If any pub could not work under this model, it could be oVered to a diVerent operator (with first right to buy oVered, at a fair price, to the sitting tenant—see below). There are also real concerns about the fairness of assessment of rent. Some form of national system should be established to allow for the assessment of the fairness of rents charged to individual tenants. Tenants currently have little or no right to challenge rent levels apart from paying themselves. This is exploitative. All tenants should have access to independent arbitration, which should be a legal right within the terms of the tenancy. The costs of arbitration should be included as a cost against profits for rent purposes. Concern has been expressed about the independence of the RICS Trade Related Valuation Group because it includes representatives of pubcos and valuers who represent pubcos but no representatives of tenants. A truly independent panel should be commissioned to review this issue. There needs to be an overhaul of the current system to create a mandatory code of practice that creates transparency, a register of rental values and an agreed form of profits based valuation that takes account of the real costs of the tenant. We are concerned that some tenants are forced through the terms of their lease to sign up for other things such as insurance through the pub owning company. This is an abuse of the business partnership. The small business operators should have the right, as other small businesses do, to shop around and make such decisions for themselves.

4. Problem with access to market for smaller (inc. more local) breweries which restricts customer choice The current dominance of a few pubcos creates significant barriers to entry for smaller brewers. This is not good for these businesses or for customer choice. Brewers can only supply their products to pubco tenants if they are on the pubco lists, and pubcos require that brewers oVer them substantial discounts. In many cases smaller brewers are almost completely excluded from their own local markets. So often a local brewer can’t get into local pubs because they are all pubco/tied houses. This is a diYcult problem to address, however having more pubs in the hands of more and smaller operators and including a higher proportion of free houses should assist this. The latter would happen if tenants and communities were given a genuine right to buy when pubs are sold. It would also be assisted by regional/local application of the “pub orders” which would prevent domination by a few companies in any one market/area/town.

5. Restrictive covenants A particularly deplorable practice is the use of restrictive covenants to prevent future purchasers from continuing to use the premises as a pub. The company concerned often takes an entirely self interested decision to permanently shut pubs against the wishes of the community served by the pub simply to serve their own commercial interests. The ease with which pub companies are able to dispose of struggling pubs, usually for alternative development, reduces the financial incentive they have to work with a lessee to turn around a pub in diYculty. The result of this is to restrict competition and to strengthen the market dominance of an individual company in a locality. The use of restrictive covenants should be outlawed and as quickly as possible. Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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6. Automatic right to buy for lessees and for communities At the moment it is possible for a pub to be sold without the knowledge of the existing lessee. This is scandalous and shows how few rights the small business has in the relationship with large companies. Existing lessees should be given the right to buy the freehold of their pub. The easiest way to do this would be to introduce legislation to prevent a pubco or brewer selling a pub without first oVering it to the sitting lessees at the market rate. The Land Reform (Scotland) Act 2003, which includes a community right to buy, provides a precedent which could be copied. Communities should also be given the right to buy their local pub. Where a community group wishes to buy a pub they should be able to apply to the Minister to appoint an independent valuer to assess fair market value.

7. Other recommendations The AWP tie should be abolished. It should be removed by legislation or a mandatory code of practise.

Conclusion The only people who don’t want any reform to a system that is not working—not for pub customers, tenants or smaller breweries—are those who have a vested interest in maintaining the status quo. Luckily the debate has moved on considerably and the arguments against any reform have been shown to be misleading and flawed. Reform is essential and for the sake of the future of the British pub, it needs to come as soon as possible. 25 March 2009

Memorandum submitted by the Association of British Insurers I understand that at a recent hearing of the Committee, it was asserted by some witnesses that it was possible for a company owning a pub to take out insurance against the risk of a tenant defaulting on the rent. There is no insurance which covers default in the event of business failure or abandonment. The only circumstances in which insurance covers rent payments is where there is damage to the premises, for example from fire or flood—in other words, as part of or relating to property insurance where it is hysically impossible to continue trading. I hope that this clarifies the position. 5 March 2009 Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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PubCo Licensee Survey

Report Produced for House of Commons’ Business & Enterprise Committee

February 09

The Future Size & Structure of the On-Trade • The On-Trade in 2013 compared to December 2008:

GB 2013 131,088 (-6.1%)

Eating Drinking Enjoying Sleeping 37,382 (+7.9%) 59,961 (-14.8%) 18,358 (-1.9%) 15,387 (-2.9%)

Restaurants Wet Led Pubs Nightclubs 24,250 (+7.0%) 28,897 (-16.0%) 2,245 (-17.4%)

Food Led Pubs Social Clubs 12,506 (+9.3%) 14,592 (-17.3%)

Circuit Bars 15,057 (-10.8%) Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

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Changing Pub Universe

• Accelerating pub closure rate achieved substantial media coverage: – 38% closures in areas of high economic deprivation, low incomes and elderly consumers – Current closure rate likely to be maintained for next 2-years Average Weekly Net Pub Closures 2004-08

0 -2 -6 -5 -8

-10

-15

-20

-25 -27

-30

-35 -39 -40 2004 2005 2006 2007 2008

The Future Size & Structure of the On-Trade

Total On-Trade Outlets 2004-2013 146,000 +0.3%

144,000 -1.1% 142,000 -0.8% -1.3% 140,000

138,000 -2.5% 136,000 -2.1% 134,000 -0.7% -0.4% -0.4% 132,000 130,000 128,000 126,000 124,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

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Adapt to survive?

• Since 2004 6,074 pubs & bars have switched market segment – 92% of pubs that closed in 2008 trading with the same offer as in 2005 • Community/Wet Led/Local pub sector has seen most change – 2,438 pubs moved to food or adapted offer to attract different customers

Migrations from Community/Wet Led Pub Sector, 2004-08

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Dry Led Circuit Bar Café Bar / Wine Bar

Methodology

• Identify tenanted and leasehold pub outlets to call

• Create representative sample in terms of PubCo’s with a non- managed estate > 1,000 by geography and estate size

• Telephone research used to contact licensees only

• Creation of questionnaire and database to input responses from licensees

• 1,000 licensees contacted between 02/02/2009 and 21/02/2009 for Licensing Questionnaire Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 293

Report Overview – Key Numbers

• There are a total of 31,254 Non Managed Pubs in GB • Enterprise Inns, 7,581 outlets – 24% of total • Punch Pub Company, 7,287 outlets – 23% of total • Admiral Taverns, 2,386 outlets – 8% of total • Marston’s, 1,932 outlets – 6% of total • Greene King, 1,428 outlets – 5% of total • SNPE, 1,205 outlets – 4% of total • Wellington, 1,028 outlets – 3% of total

• Pub Co estates split into 6 regions, reflected in outlets contacted •Scotland •North East •North West • Midlands •South East • South West & Wales

• These 7 Pub Companies account for 73% of GB Non Managed outlets • ‘Other’ Pub Co’s with less than 1,000 outlets account for 27% of GB total • CGA contacted 270 outlets (27%) to record their responses

Methodology - Sample breakdown by Owner Group

% of non managed Owner Group universe To Contact

Enterprise Inns 24% 240

Punch Pub Company 23% 230

Admiral Taverns Ltd 8% 80

Other Retail Groups (< 1000 Outlets) 27% 270

Marston's 6% 60

Greene King 5% 50

S & N Pub Enterprises 4% 40

Wellington 3% 30

TOTAL 100% 1000 Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 294 Business and Enterprise Committee: Evidence

Methodology – Owner Group breakdown by Geography

Numbers to Call by Region

Owner Group Midlands North & NE NW Scotland South East SW & Wales To Contact

Enterprise Inns 28 51 27 0 97 37 240

Punch Pub Company 44 44 35 14 66 27 230

Greene King 11 2 0 5 31 1 50

Wellington 2 1 1 0 22 5 30

Admiral Taverns Ltd 17 15 14 0 22 11 80

SNPE 5 8 10 6 8 3 40

Marston's 28 12 11 0 3 7 60

Industry Commentary

In an environment where revenues, EBITDA and operating profits are under what seems like relentless downward pressure, rents are sticky on the downside. Indeed in many cases, rents simply cannot fall. The UK may register a period of deflation later this year. Profitability for some operators may collapse but still rents will not go down. This is understandable as why should a landlord, who has entered into a contract with a tenant in good faith, tear up that contract? If the tenant performed well he would not take kindly to paying more rent (although this may happen on review) so why should he pay less if he comes under pressure? In ‘normal’ circumstances, when the economy is growing and where prices are rising, this will not tend to be an issue but these are not normal circumstances. Unless landlords show a degree of flexibility they may ultimately leave their tenants with no option other than to call in the administrators, often in the shape of a pre-pack, after which they may be handed back the keys to their least profitable units with a consequent impact on the asset’s capital value. Of course the above may lead to a classic ‘macro vs micro’ conundrum. Whilst it would be ‘better’ for the economy (certainly smoother) if landlords cut their rents, at the micro level, which landlord in his right mind is going to offer to put his head in a noose and signal to the market that he’s negotiable on the downside? Mark Brumby, Industry Analyst, Blue Oar Securities Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 295

Q1 – Length of time of Original Lease Owner Groups vs. Sample

– Wellington has a significantly larger proportion of long-term lease agreements – SNPE has a higher than average number of licensees on short-term lease agreements

100%

90% No Response 80%

70% > 15 years 60%

50% 11-15 years

40%

30% 6-10 years

20%

10% 0-5 years

0% Outlets in Admiral Enterprise Greene Marston's Punch SNPE Wellington Sample King

Q2 & Q8 – Years into lease vs How licensee feels about tie

– Negative feelings about the tie increase slightly as licensees spend longer in the trade – Positive feelings about the tie decrease slightly as one may expect

100%

90% 13% 10% 77% > 15 years 80%

70% 9% 18% 11-15 years 60% 73%

50% 11% 40% 15% 6-10 years 74% 30%

20% 14% 0-5 years 17% 10% 69%

0% Negative Neutral Positive Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 296 Business and Enterprise Committee: Evidence

Q3 – From whom was lease originally purchased? Owner Groups vs. Sample

– Enterprise and Wellington both show a significantly lower proportion of PubCo assigned leases – By contrast, SNPE and Admiral are responsible for directly assigning lease agreements to licensees • More investigation is needed to ascertain whether this is as a result of the perceived viability of the business 100%

90%

80%

70% Assigned from 60% previous Tenant

50%

40%

30%

20% Directly from Pubco 10%

0% Outlets in Admiral Enterprise Greene Marston's Punch SNPE Wellington Sample King

Q3a – Cost of purchasing lease? Owner Groups vs. Sample

– Wellington and Enterprise have greatest proportion of outlets whose lease cost more than £100,000 – The most common cost of entry into the trade is between £10,000 and £50,000

100%

90% > £100,000

80%

70% £50,000- £100,000 60%

50% £10,000-£50,000

40% < £10,000 30%

20% Nil Premium 10%

0% Outlets in Admiral Enterprise Greene Marston's Punch SNPE Wellington Sample King Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 297

Q3a & Q16 – Cost of purchasing lease vs Personal Income

– Surprisingly, 85% of licensees (who responded) whose lease cost more than £100,000 are earning less than £15,000 – There is no evidence from licensee responses that paying more for a lease means a higher income

90%

80% Nil Premium

70% < £10,000 60%

50% £10,000- £50,000 40%

£50,000- 30% £100,000

20% > £100,000 10%

0% < £15,000 £15,000-£30,000 £30,000-£45,000 £45,000-£60,000

Q4 – Did you seek INDEPENDENT financial/legal advice?

– 69% of licensees surveyed sought Independent Financial and/or Legal advice

2% Yes

29%

No

69% Don't Know Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 298 Business and Enterprise Committee: Evidence

Q5 – Was information and advice from your Pubco sufficient preparation before signing lease?

– 65% of licensees surveyed believe the advice from their Pubco sufficiently prepared them for signing their lease; worryingly 34% did not feel sufficiently prepared with regards information from their Pubco

1% Yes

34%

No

65%

Don't Know

Q6 – Which Products/Services are you tied for?

– Licensees are most often tied for draught products and packaged bottled products – 14% of licensees surveys were fully tied for all products and services – Interestingly, Wellington Pub Co do not enforce a tie and act as landlords only

All Draught 59% Beer & Spirits

Gaming Machines 40% Insurance

Soft Drinks 22% 20% All Packaged 14% 11% Full Tie 6% 3% Not Tied

Outlets in Sample Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 299

Q7 – Why did you choose your tied pub?

– Interestingly, licensees who chose a tied pub wanted to run a specific venue which happen to be tied – Only 2% were looking for free of tie pubs – The most common other reasons given were ‘location’ and the low cost entry of running your own business

Other 9% This specific Pub 59%

No free of tie % 2% available

3% Business support from Pubco

23% Lost cost Entry

0% 10% 20% 30% 40% 50% 60% 70%

Q8 – Satisfaction with Tie Owner Groups vs. Sample

– 17% of SNPE licensees surveyed answered ‘fairly positive’ or ‘very positive’; 4% above average sampled – 90% of Marstons licensees feel ‘fairly negative’ or ‘very negative’ with their tie; 20% above average

100% 7% 13% 10% 10% 12% 90% 23% 33% Neutral 80%

70%

60%

50% 70% 85% 90% Negative 87% 86% 70% 50% 40%

30%

20% Positive 10% 13% 17% 5% 7% 0% 3% 2% 3% Outlets in Admiral Enterprise Greene King Marstons Punch SNPE Sample Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 300 Business and Enterprise Committee: Evidence

Q9 – To what extent does Pubco add value? Owner Groups vs. Sample

– 0% of Greene King, Enterprise, Admiral or Marstons licensees surveyed believe their pubco adds ‘a lot’ of value to them – 76% of Greene King licensees and 77% of Punch and Enterprise believe their pubco’s add no value at all 100%

90% 77% 76% 50% 67% 61% 64% 77% 80% Not at All

70%

60%

50% A little

40%

30% 42% 31% 39% 20% 28% 23% 24% 19% A Lot 10% 5% 0% 5% 4% Outlets in Admiral Enterprise Greene King Marstons Punch SNPE Sample

Q10 – Satisfaction with Pubco Owner Groups vs. Sample

– 80% of Wellington licensees (no beer tie) surveyed answered ‘fairly satisfied’ or ‘very satisfied’ – 86% of Greene King licensees are dissatisfied with their Pubco

100%

90% Neutral 80%

70% These two pubco’s are polar 60% opposites in terms of licensee 50% satisfaction Dissatisfied (-ve)

40%

30%

20% Satisfied (+ve) 10%

0% Outlets in Admiral Enterprise GK Marstons Punch SNPE Wellington Sample Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 301

Q11 – Have you been shown a breakdown of how rent is calculated by your Pubco?

– 54% of licensees surveyed had been shown how their rent was calculated by their Pubco – 44% had not been shown how their rent is calculated

2% Yes

No

54% 44% Don't Know

Q12 – Do you have an RPI rent review clause?

– 50% of licensees surveyed have an RPI rent review clause

No 16% 34%

Yes

50% Don't Know Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 302 Business and Enterprise Committee: Evidence

Q12a - If Yes, did it replace an upward only clause?

– 27% of licensees surveyed said their RPI rent clause replaced an upward only clause – Worryingly, 51% of licensees did not know

No 51% 22%

Yes

27% Don't Know

Q13 – Does rent take into account your beer tie?

– 82% of licensees DO NOT believe rent takes the beer tie into account; 10% above the overall average

100%

90% Don't Know 80%

70%

60% No 50%

40%

30%

20% Yes

10%

0% Outlets in Sample Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 303

Q14 – Do you have to produce accounts for your Pubco?

– 64% of licensees surveyed do not need to produce accounts for their Pubco

100%

90%

80%

70% No

60%

50%

40%

30% Yes

20%

10%

0% %

Q15 – Annual Turnover?

– Most licensees who answered this question turnover between £100,000 and £200,000 per annum – This equates to approximately £2000-£4000 per week turnover

100%

90% > 500,000

80%

70% £300,000-£500,000

60%

50% £200,000-£300,000

40% £100,000-£200,000 30%

20% < £100,000 10%

0% Outlets in Sample Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 304 Business and Enterprise Committee: Evidence

Q16 – Personal Income

– 67% of licensees who responded said they earned less than £15,000 per annum – Only 10 licensees out of 788 who answered said they earned over £45,000 100%

90% > £60,000

80%

70% £45,000-£60,000

60%

50% £30,000-£45,000

40% £15,000-£30,000 30%

20% < £15,000 10%

0% Outlets in Sample

Q15 & Q16 – Turnover vs Personal Income

– More than 90% of licensees earn £30,000 or less in outlets turning over less than £300,000 – 50% of licensees in outlets turning over in excess of £200,000 p/a earn > £15,000

1% 1% 100% 54% 11% 90% > £60,000 21% 24% 29% 80%

70% £45,000 - £60,000 41% 14% 60% 30% 5% 50% £30,000 - £45,000 40% £15,000 - 30% £30,000 20% 89% 75% 52% 48% > £15,000 10% 52% 0% < £100,000 £100,000 - £200,000 - £300,000 - > £500,000 £200,000 £300,000 £500,000 Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 305

Q17 & Q18 – Amount spent on Refurbishing Licensees vs. Pubco

– Licensees are spending significant sums refurbishing their venues, most times spending more than their pubcos

100% 15% 4% 4% 10% 90% > £100,000 12% 80% 21% 70% £50,000-£100,000 41% 60%

50% £10,000-£50,000

40% < £10,000 30% 32% 61%

20% No n e 10% 12% 0% % Lic e ns e e % Pubco

Q19 – Is your pub struggling financially? Owner Groups vs. Sample

– It is clear that licensees from all PubCo’s are struggling in terms of financial hardship – Both Marstons and Admiral show a much higher than average proportion of struggling licensees

100%

90%

80% No

70%

60%

50% Yes 40%

30%

20%

10%

0% Outlets in Admiral Enterprise GK Marstons Punch SNPE Wellington Sample Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 306 Business and Enterprise Committee: Evidence

Q19 – Licensee perceptions on reasons for struggling financially

– 41% of licensees stated that the price of goods and services due to the beer tie was the single most important factor in terms of their current financial struggle – Factors linked with the tie account for 60% of grievances; external economic factors account for 40% 100%

90%

80%

70%

60%

50% 1 Most Important 41% 40%

30% 19% 20% 14% 8% 8% 10% 7% 3% 0% Cost of Rent Price of Tied Smoking Ban Supermarket less custom less spend Other Products Pricing

Q19 – Licensee perceptions on reasons for struggling financially - Admiral Taverns

– 75% of Admiral licensees stated that the price of goods and services due to the beer tie was the single most important factor in terms of their current financial struggle – This is the highest figure in this category from any group 100%

90%

80%

70%

60%

50% 1 Most Important

40%

30%

20%

10%

0% Cost of Rent Price of Tied Smoking Ban Supermarket less custom less spend Other Products Pricing Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 307

Q19a – Licensee perceptions on reasons for struggling financially Enterprise Inns

– Enterprise licensees blame the price of goods through the beer tie for their current financial struggle – Business Rates was by far the greatest concern in the ‘Other’ category

100%

90%

80%

70%

60%

50% 1 Most Important

40%

30%

20%

10%

0% Cost of Rent Price of Tied Smoking Ban Supermarket less custom less spend Other Products Pricing

Q19a – Licensee perceptions on reasons for struggling financially Greene King

– Greene King licensees are split between blaming the cost of rent and price of goods for their financial hardship – Both these reasons put the blame squarely at the door of the Pub Company 100%

90%

80%

70%

60%

50% 1 Most Important

40%

30%

20%

10%

0% Cost of Rent Price of Tied Smoking Ban Supermarket less custom less spend Other Products Pricing Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 308 Business and Enterprise Committee: Evidence

Q19a – Licensee perceptions on reasons for struggling financially Marston’s

– Marstons licensees (similar to those at Greene King) blame the Pub Company for their financial hardship – External factors, namely supermarket pricing, received 7% of the total responses for the single most important reason behind their current situation 100%

90%

80%

70%

60%

50% 1 Most Important

40%

30%

20%

10%

0% Cost of Rent Price of Tied Smoking Ban Supermarket less custom less spend Other Products Pricing

Q19a – Licensee perceptions on reasons for struggling financially Punch Pub Company

– There is a much more even spread in terms of reasons behind the current financial hardship given by Punch licensees, perhaps indicative of the ‘Perfect Storm’ licensees are faced with – The most common reason in the ‘Other’ category seems to be the soaring cost of Utility Bills 100%

90%

80%

70%

60%

50% 1 Most Important

40%

30%

20%

10%

0% Cost of Rent Price of Tied Smoking Ban Supermarket less custom less spend Other Products Pricing Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 309

Q19a – Licensee perceptions on reasons for struggling financially SNPE

– SNPE licensees once again give a range of reasons for their current struggle – interestingly NOT supermarket pricing – 45% of respondees blame the Pubco tie (21% cost of rent and 24% price of goods) 100%

90%

80%

70%

60%

50% 1 Most Important

40%

30%

20%

10%

0% Cost of Rent Price of Tied Smoking Ban Supermarket less custom less spend Other Products Pricing

Q19a – Licensee perceptions on reasons for struggling financially Wellington

– The smoking ban and ‘Other’ factors are the main reasons for Wellington licensees’ struggle – The most common ‘Other’ factor was the increase in Government duty and business rates

100%

90%

80%

70%

60%

50% 1 Most Important

40%

30%

20%

10%

0% Cost of Rent Price of Tied Smoking Ban Supermarket less custom less spend Other Products Pricing Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 310 Business and Enterprise Committee: Evidence

Q20 – Have you received financial help from your Pubco?

– 26% of licensees surveyed have received some form of financial help from their Pubco

1% Yes 26%

No

73% No Response

Q20a – What conditions were made for financial help?

– No conditions on financial help by the Pubco were applied in 59% of cases – Only 11% of licensees were asked for an increase in rent; 12% for an increase in their tie

No Conditions 59%

Other 15%

% 3% Interest Charged

12% Increase in rent

11% Increase in tie

0% 10% 20% 30% 40% 50% 60% 70% Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 311

Q21 – Have you had a dispute with your Pubco?

– 20% of licensees surveyed have had a dispute of some sort with their Pubco

20%

Yes No

80%

Q21a – Satisfaction with dispute resolution methods?

– 51% of licensees were dissatisfied with the outcome of their dispute; 44% were ‘Very Dissatisfied’ – Just 18% of licensees gave a positive response in terms of satisfactory resolution methods

100% 8% 90% Ongoing/Unresolved

80% Very Dissatisfied 70% 44%

60% Fairly Dissatisfied

50% 7% Ne u t r a l 40%

30% 23% Fa ir ly Sa t is f ie d

20% Very Satisfied 10% 13% 5% 0% Outlets in Sample Processed: 08-05-2009 02:36:01 Page Layout: COENEW [E] PPSysB Job: 420592 Unit: PAG1

Ev 312 Business and Enterprise Committee: Evidence

Q21b – Licensee Comments

• I wouldn't have had a home if I didn't agree to the result • Enterprise with only offer a rolling 6 month lease and licensee believes if they can get someone to buy they will turf him out • Wendy was born in this pub and her mother is ill, so they will not leave at the moment but you never know. They couldn't pay the rent recently and GK were not at all helpful they were threatened with a 2 week eviction order, so she had to get a loan and back the arrears • Licensee spoke to GK rep in July and said "Do I have to go bankrupt before GK will help" and the rep answered "Yes". She is disgusted • Too many problems to list, but main one is that as he is 70yrs old and not on-line he has to pay £5 to receive invoices in the post instead of printing them on-line, Has earned £600 bonus towards barrelage but not on-line so GK won't pay, GK charge him £1000 a year for building insurance but won't give him the policy or tell him who he is insured with

Q21b – Licensee Comments

• Tenancy up for renewal and Marstons want her to sign as she has increased turnover but because bills go up she isn't really taking any more money, if Marstons don't negotiate and compromise she is off • Greene King tried to up rent by £300 per week but licensee refused and in the end Greene King backed down and accepted original Hardy and Hanson terms but were not happy. Since then he's had no contract with GK at all • Licensee happy to speak with Select Committee. Greene King are stubborn and won't negotiate. If you don't like their terms then 'tough'. Rent was based on 13% of barrelage ordered but on the original details licensee believes that GK overestimated the true amount of barrelage by 40 per annum. Licensee is still in dispute with GK and he has proof that over estimate of barrelage is a fact. GK have given him 3 months free rent and now charging half rent but don’t know for how long Processed: 08-05-2009 02:36:01 Page Layout: COENEW [O] PPSysB Job: 420592 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 313

Q22 – Will you still be in pub trade in 12 months?

– Buying a freehold outlet to escape the tie is not a ‘perceived’ or ‘intended’ option for most licensees. Only 4% stated they intend to do that in the next 12 months – Factor in the general dissatisfation with the PubCo’s and the perceived inability by licensees that they have the option to move, then you have the potential for growing resentment and antipathy

No - leaving trade 20% Yes - buying freehold 4%

Yes - moving % 2% Pubco

1% Yes - more leases with Pubco 73% Yes - lease with Pubco

0% 10% 20% 30% 40% 50% 60% 70% 80%

Q22a – Reason for leaving trade?

– Financial reasons, not enough money and the difficulty of making a living were the main reasons given – In an earlier slide, 67% of licensees who responded said they earned less than £15,000 per annum

Too Stressful 13% Other 13% Pubco 2% terminated lease

Harder to make a % 46% living

7% Personal circumstances

6% Retiring

13% Lack of support from Pubco

0% 10% 20% 30% 40% 50%

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