MR BRIAN JACOBS, MR CLIVE DAVENPORT AND MR PAUL DALY

18 NOVEMBER 2008

  Q20  Mr Oaten: I would like to have on record the number of pubs which are disappearing. Mr Jacobs said interestingly that if the Committee's recommendations had been put in place you do not think so many pubs would be disappearing. I spent Thursday night working behind the bar in a pub in my constituency which was a fascinating experience, but I was left with the clear impression there that the landlord would be quite happy to disappear and may have to do that to get out of the business. Roughly how many pubs are disappearing each week?

  Mr Davenport: On average 27.

  Mr Jacobs: That is one figure that has been quoted. Recently the BBPA quoted 35 per week.

  Mr Davenport: It is accelerating.

  Mr Jacobs: Unfortunately the BBPA and the pubcos are trying to blame it all on the free of tie pubs. They say it is only the free of tie pubs which are closing. If you look round to your own constituencies and your own areas you will see that that is a total nonsense.

  Q21  Mr Oaten: Can you give me a figure? What percentage are free of tie?

  Mr Jacobs: I would say that if you took that 35 probably five would be free of tie and 30 would be the tied. I think that is more likely to be the truth but I have no actual physical evidence.

  Q22  Mr Oaten: Does anybody have any accurate data on it?

  Mr Davenport: There is no accurate data. All I know is that in the local area where I live the ratio is basically that. It is a huge ratio of tenancy pubs being closed. What the pubcos do do as well is that if a tenant walks away they put in a holding company to keep the pub going. They have a totally different set of rules when they are operating under that agreement anyway. There is a totally different set up there.

  Q23  Mr Oaten: We can split off the pubco ones which are disappearing, in how many of them do they use the tenancy period when it ends to shut the pub? Or how many is it where the tenant just has to give up?

  Mr Davenport: I think there is a high ratio of the tenants actually walking.

  Mr Jacobs: I think that 35 are the tenants walking. The pubs are closing and the people going away, going to the local authority and saying they are homeless and asking for a roof over their heads.

  Mr Davenport: The pub that I was talking about where there were five in eight years, every one of them walked; one of them did not walk, obviously.

  Mr Daly: In a lot of these cases because of the personal guarantees that people have undertaken it means bankruptcy so they lose other assets, their house for example. It is not just walking away; it is much more sinister than that unfortunately. They bear down until the end.

  Mr Jacobs: In many cases the pubcos have a two year insurance policy so that if somebody walks out they still get the insurance company to cough up the rent for two years, so therefore they are not worried. It is the poor tenant that gets kicked out who has to find a roof to go over his head. They are the ones who are suffering.

  Mr Davenport: It is the tenant who pays the insurance.

  Q24  Mr Wright: You give the figure of 30 tied and five free would close, how many of those 30 would actually be let in a very quick period of time?

  Mr Jacobs: They are closed. There is another statistic that I cannot get hold of of pubs which are in a transitional period. They are not surviving. The tenant goes and they find someone else to handle it quickly. That one goes and they find another one. They just keep it going. We do not have a statistic for that but we know it is big. We know it is big because, as Clive said, a pub in his area had five management changes but those five management changes are not clocked up on the 35 closures. It is far worse. It is much, much worse. The 35 is just the tip of the iceberg.

  Mr Daly: Even if they are rented out again, which some of them might be, there is still somebody who has gone out of business, somebody has gone bankrupt, jobs have been left.

  Q25  Mr Wright: Is that another incentive for the pubcos to actually get rid of a tenant who quite clearly has gone bankrupt in many cases and then put somebody else in his place so they can reopen the whole thing again and pay the bills?

  Mr Jacobs: They are only interested in collecting money to service their debts. Punch have got about £4.5 billion of debt; Enterprise I believe is about £3.5 billion. It is a lot of money.

  Q26  Chairman: Is there any pattern between urban and rural areas that you are detecting? Is there any distinction?

  Mr Jacobs: I have not looked at rural areas as against city areas. I cannot really give you an answer on that.

  Mr Davenport: I have anecdotal evidence but it is only that and I would not like to use it. We do not have statistical evidence for that.

  Q27  Mr Binley: Would you be able to send that to us because it really does break down the structure of rural life in rural areas. That is the difference between rural and urban in this respect.

  Mr Jacobs: The difficulty is actually getting to the statistics. The BBPA will probably have the information and the licensing authorities.

  Q28  Mr Oaten: On the rent side of it, I think the Fair Pint survey said that 91% of tenants said they felt their establishment was over-valued.

  Mr Jacobs: Yes.

  Q29  Mr Oaten: Can you tell me a bit more about that? What is behind that?

  Mr Jacobs: The basic problem is that the pubco valuers and arbitrators basically ignore the value formula which says that the tied tenant should not be worse off financially than if they were free of tie. It is as simple as that. That is easy to prove. You start with a model that shows you what it would make if it were free of tie and you see what it would make if it were tied. You alter the equation so that the tenant should not be worse off. Valuers will not accept that. As long as valuers will not accept that the rents for the tied premises are going to be too high. It is as simple as that.

  Q30  Mr Oaten: Does anyone else want to comment on that?

  Mr Daly: I have direct evidence of that. In my case Enterprise have the head lease with Hackney Council and they pay £1000 a year and they charge me £26,000 a year. So that is 2,500% profit. But in my free of tie venue the cost per square foot is £23 (this is the trading area) and the tied venue is £25 per square foot. So the rent is more in the tied venue and you have to deal with the tie on top of that. The rent is more per square foot than the free of tie venue. That is very important.

  Q31  Mr Oaten: Am I right in thinking that one of the problems with this process is that when somebody 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. Enterprise, for example, are telling us in a memorandum that that is something which is available. What is going on? How widely available is the previous tenant's profit and loss to the new tenant when it comes to that negotiation?

  Mr Jacobs: That is a very important aspect because if the incoming tenant knew how the preceding tenant was performing and what his financial position was he would look at it in a totally different light to how very often they do. I think that is probably the reason why pubcos do not actually release that information to incoming tenants.

  Q32  Mr Oaten: Do they or do they not? Enterprise say that best practice is to do so.

  Mr Jacobs: Best practice is double talk. Best practice is what should be done; it does not mean it is done.

  Q33  Mr Oaten: So on the record you are saying that Enterprise do not actually do what they say they do.

  Mr Jacobs: That is my opinion.

  Mr Daly: I have some direct experience of this. I had to pursue the previous tenant and then he was not very forthcoming for some reason. I had no figures.

  Q34  Mr Oaten: Clive, do you have anything to add on that?

  Mr Davenport: No, we do not have any stats on that.

  Q35  Mr Binley: There has been a change because barrelage was discussed between new tenant in relation to the district manager and the rent. We used to talk about a 250 barrels pub or a 270 barrel pub; does that not happen any more?

  Mr Jacobs: To a degree that still happens. The problem is that one measure—barrelage—is not sufficient to define whether the pub is financially viable because there are so many other elements. You can take two pubs side by side, both doing 200 barrels. One can be 10,000 square foot; one can be 5000 square foot. One is carrying 10,000 square foot of overheads—heating, lighting, so on and so forth—the other is 5000. One is making a profit, one is making a loss. The rates should be the same. That is what the pubco would say.

  Q36  Chairman: I want to ask you a technical question really. If the free of tie landlords do not have to declare their rents, what comparables can we actually use to judge whether a tied rent is reasonable or unfair?

  Mr Jacobs: It is quite easy to justify whether a tied rental is reasonable or fair relative to a free of tie pub. You can look at what the barrelage is, you ask what discount there is and they will tell you what it is. What can you obtain in the open market? They will give you a specific example. Say they have given you £40 a barrel but in the open market you can get £100 a barrel, the difference is £100. Two hundred barrels, £20,000. That is your wet rent. What are you paying as a lease rent? £20,000. So the total rent is £40,000. Question: is the free of tie pub—if it were free of tie—paying £40,000? If the answer is less, they are charging too much. It is quite a simple equation.

  Q37  Chairman: Giving the declining importance of beer sales in many pubs' revenues, perhaps restaurant leases might often be a comparator?

  Mr Jacobs: Not necessarily. The whole concept of rents in the pub industry is that it is profit based so therefore when you calculate the profit you calculate the turnover of the food, the accommodation, the AWP machines, the beer, the wines, the spirits, the minerals, the lot. That is your total turnover. What manning do you require and what are your overheads to work out profit, and from that the profit should go directly to what the rent should be.

  Mr Daly: As a free of tie tenant I had a call made to me by the valuers who are doing rent reviews for other people in Hoxton Square in East London. They ask me what my rent is and I would obviously 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 that is the way it should be done so they end up with the market price.

  Q38  Mr Wright: Why do prospective publicans enter into beer tied tenancies?

  Mr Daly: They do own so much of the stock that it becomes a law of averages thing. In my case it was advantageous to me from a staff point of view to have another bar near my free of tie bar. I wanted to expand, I wanted to employ more people; I am an employer, I want to grow. There was not much stock available that was not free of tie. As I started trading within that I saw more and more sinister ways of how they get money out of you, hence why I am here.

  Mr Jacobs: Between pubcos and brewers they account for about 70% of the total pubs on the market, 30% free of tie. Therefore if you are looking to acquire trading premises, there is your market. The market is very narrow for the free of tie so therefore you are almost forced into a corner; you have to go to pubcos or brewers to get a pub if that is what you want, or you have to go to that very, very narrow market and wait until something comes available.

  Q39  Mr Wright: Some of them have a cooling off period so that if there are particularly problems after, say, three months, you can release yourself from that particular tie. Why is that something that people do not do? Is the cooling off period too short a time?

  Mr Jacobs: The cooling off period is very short. Generally speaking when you get into a pub the very first thing you do is sort out all the inherent problems of customers, of suppliers, of staff and so on, taking in all the legislation on the way. The first three months are spent just trying to get hold of the reins of this vehicle. The next three months you are going to try and steer it in a direction. The next six months you will start to know whether you have made the right decision or not. The following 12 months you will know. It is a bit like trying to teach somebody how to run a pub in three months.