Phil Dixon, licensed trade consultant, looks at what happened when atenant/lessee outperforms all predictions, and trades in excess of the FMT.
My June column on fair maintainable trade (FMT) appears to have touched a nerve or two. It’s not every day you get a pleasant and complimentary email from a member of the Fair Pint Committee alongside two equally gracious ones from pubco property directors.
So, having commented on FMT for new licensees, let’s look at the issue of what happens when the existing tenant/lessee outperforms all predictions, and trades in excess of the FMT.
In theory, there should be no problem, as Royal Institution of Chartered Surveyors’ guidelines state that you have to disregard the goodwill created by the tenant, and all pubco codes of practice proudly proclaim the following statement: “We will not penalise you for your success at rent review.”
Sadly, too many times this phrase has all the sincerity of “the cheque is in the post” and “voting Liberal Democrat will help reduce tuition fees”.
Over the years I’ve asked some of our captains of industry how much of their trade was down to the abilities of the tenant. Between 50% and 75% was always the ball-park figure.
In 2006, after winning numerous Publican and Morning Advertiser awards, the operators of one pub were on the verge of being crowned UK Licensees of the Year, when their pubco’s chartered surveyor informed them that any reasonably efficient muppet would do 90% of their trade, trebled their FMT and suggested that their rent of £30,000 should now begin with an eight.
He also added, with all the ethics of a solar panel commission-only salesman, he’d consider a lower figure if they signed there and then.
I got involved and informed the surveyor that I had wrapped his rental proposal around a pineapple, smothered it with ‘free of tie’ KY Jelly and knew where I would like to stick it. Un-fortunately, I confirmed this in writing and received a justifiable rebuke from the MD. But eventually we agreed on a 40-something figure and the licensees signed, despite still feeling it should have been slightly less.
In fairness to the company it recently agreed again on that very figure and I was presented with a pub polo shirt celebrating my non-involvement in the review.
In 2008 a single lady tenant saw her outlet crowned ‘Pub of the Year’ at a glittering event. The CEO praised her food offer, which was produced by a kitchen he referred to as “a cupboard”. Six months later an estates rep informed her that her FMT had drastically increased and that her rent that began with a two should now commence with a four. Luckily, she was a BII (British Institute of Innkeeping) member and they arranged for Rodger Vickers FRICS (no less) to represent her. And now the rent continues to begin with a two.
In 2010 a BII member and Great British Pub Award-winning host was told his rent needed to be increased from £60,000 to well over £70,000.
When asked what goodwill had been allowed, his business development manager respon-ded that the rent was simply based on his actual pre-smoking-ban beer volumes, which he had managed to maintain in the recession. So despite being judged best pub in his region, not one single pint was down to the licensee and his partner’s abilities. He elected to go to the Pubs Independent Rent Review Scheme (PIRRS), but — faced with overwhelming evidence — the company settled at a figure in the late 40s.
In the Thames Valley in 2011, a pub had a rent starting with a three, but was transformed by a super-retailer into an oasis of high standards. Despite the downturn, the landlord company believed a new rent starting with an eight was now justified with a newer, far higher FMT. The lessee offered a modest rise, but this one went all the way to PIRRS, the rent was actually set at less than the licensee offered and the company, on reflection, apologised for its actions and paid all the PIRRS costs.
I received a phone call last Friday. It was from a PMA award winner with a host of company awards, including best pub in the estate. They are finding times tough, but the company’s chartered surveyor, despite acknowledging increased overheads, tried to justify maintaining the current rent and set the FMT above the multi-award winner’s trading levels. I ended the call and shouted from my office to my beloved: “Are you writing the shopping list?” “Yes” she replied. “Add a pineapple!”
So what needs to be done? If a pub is offered to a prospective licensee and they out-perform the FMT, that FMT should not be adjusted except for inflation unless there has been a clear change of economic circumstances (e.g. a housing estate has recently been built nearby). We will never resolve recruitment problems until we stop penalising successful retailers. Pubco directors who exceed targets are applauded and financially rewarded. Is it too much to ask for a similar approach to those who have delivered increased profits?
As for RICS members working for pubcos: if I come across, say, a tenant paying £30,000 who is then told a rent of £90,000 is fair and it is subsequently determined at, say, £37,500, I think RICS should be asked to investigate if it feels its member is a ‘chartered surveyor’ or a ‘hired gun’!
Phil Dixon is an advisor at the BII (British Institute of Innkeeping)
