David Wrightson, the director responsible for rent reviews at Christie & Co, answers the questions he is most frequently asked about the review process.
Do different pub companies have different procedures for rent reviews?
The traditional brewers usually have a business development manager or an area manager, who negotiates rent reviews directly with the tenant. These cases are rarely referred to arbitration. The new pub companies such as Unique and Punch often start in the same way, but are more likely to progress to a formal approach through their estate managers, and any disputes could lead to arbitration.
How often are rent reviews carried out?
Tenancy rent reviews are usually every three years. Lease rent reviews are more usually every five years, although some leases, such as Vanguard and Punch, have annual Retail Price Index increases as well.
Isn't the high cost of leases beginning to price people out of the market?
There are two aspects here - the premium that a buyer pays for a lease and the rent that they will have to pay.
You can negotiate on the premium and you must ensure that the rent is affordable. If you are buying an existing lease, the rent will be fixed, so if you are unhappy about the rent, you can adjust the premium accordingly. Purchasers need to be careful where there is a rent review due soon and it might be wise to get that settled before committing to purchase a lease.
Where you are looking at a new lease, you can negotiate both the premium and the rent. So, in conclusion, I don't think there is an issue with high cost, as the market will determine the terms. A lease can be a low-cost entry into the trade by comparison with buying a freehouse.
A pub is due for a rent review in a couple of months. What should the lessee do to make it all goes smoothly?
The lessee needs to prepare his case and look at the impact of competition, pricing, general economic factors in his locality and his own operating costs. This will put him in a position to counter the landlord's proposals and hopefully get a settlement by negotiation where both parties are happy with the result, or more likely, equally unhappy with the result.
A tenant has spent a lot of his own money doing up his pub and his takings have doubled over the last year or so. The landlord now wants to double the rent in proportion with the takings. Is that reasonable?
The key to this question is what exactly is meant by "doing up" the pub? If the work was genuine improvements, and that would usually be defined in the lease, the effect of these improvements should be disregarded for rent review purposes.
I recently dealt with a number of rent reviews for a landlord in connection with some large branded food pubs. On average, the rent, disregarding improvements, was 50 per cent less than full open market rental value. However, if the work was no more than putting the pub into good repair, that is unlikely to be classed as an improvement.
The main issue might then be whether the doubling in trade was as a result of the tenant's personal goodwill. The pub could now be over-trading, which should not be rentalised. But it might previously have been under-trading, in which case there might be some justification in the landlord's case.
Do the lease provisions affect rental value?
This is a vital aspect of the rent review process. Repairs, the tie and the assignment provisions are particularly relevant. The tie has a major impact on profitability. At best, the tenant could be entitled to discounts on beer, like Unique's SupplyLine deal, where discounts start at about £35 per barrel and increase to over £50. Punch also has a new lease called the Growth Lease, which provides discounts.
Many leases however, and most tenancies, do not provide discounts and the tenant has to pay the full list price for beer and sometimes other products.
Repairs can be important too. If the tenant is responsible for all repairs, this adds costs and risk. This has an impact on profitability and as such has an impact on rent. The ability to assign, however, has a positive impact on rents and there is no doubt that tenants have been prepared to pay higher rents for assignable leases, even with full repairing obligations.
Should tenants involve a specialist rent review expert for a rent review?
On average, in cases where I act for tenants, settlements are about 20 per cent lower than the landlord's asking rent. This depends on how sensible the asking rent was.
I am currently advising a tenant where the landlord, a national brewer, proposed a rent increase of nearly 200 per cent. In this case I am hopeful that the result will be substantially less, although arbitration may prove necessary due to the huge difference in opinion.
However, I am also conscious that if the landlord is asking for a fairly modest increase, and will negotiate a little bit on that anyway, it might be difficult to justify the additional fees of an expert.
What is the procedure for arbitration in connection with a rent review?
Arbitration is a process to settle a disputed rent review and it really begins when negotiations have broken down. You don't have to appoint an expert and I am aware of cases when tenants have acted, very effectively, for themselves. But generally, licensees have got a pub to run and they usually instruct an expert to deal with arbitration. The surveyor might re-open negotiations and have a final attempt to settle the review.
Failing that, the parties can either agree on an arbitrator, or the president for the Royal Institution of Chartered Surveyors can nominate an arbitrator. The nomination process alone costs the applicant £270.
The arbitrator will usually be a pub expert so he or she knows what the issues are. He will agree a timetable for both parties to make submissions and then counter-submissions, which are comments on the other party's case. Finally he will make his award, on both the rent and the costs of the process. The entire process could last anything from six months to a year.
Do rent reviews often go to arbitration?
No, it still is quite a rare event. There are several thousand rent reviews every year, whereas arbitrations can probably by counted in dozens.
Is arbitration expensive?
Yes, it can be. I have recently dealt with a case where total costs were over £50,000 that is for the two surveyors and the arbitrator. If legal advice had been required, it would have been much more.
If one party wins the arbitration, in other words if the award is better than they had offered during negotiations, all of their costs could be awarded against the losing side. However, if there is no clear winner, as in the majority of cases, it is likely to cost each party at least £5,000 including half of the arbitrators fees.
How can tenants create a better chance of winning at arbitration?
It really depends on the strength of the tenant's case.
For example, if there was intense competition from a new pub or there had been factory or office closures nearby, there may be no increase in rental value. In general, the tenant must marshal facts and evidence of recent lettings and rent reviews, and apply this evidence to the pub in question. Of course, an expert might have a better chance of convincing the landlord!