Landlords must open books for fairer rents'

The rent review process is heavily weighted against the pubco tenant, argues ALEX SALUSSOLIA, chairman of the Association of Licensed Multiple Retailers (ALMR) and managing director of Glendola Leisure

The absolute worst business process a tenant has to confront is the rent review. This process requires a highly-skilled technical argument disputing the usual ridiculous rent claim by the landlord. This proposed rent increase is often well above the tenant's ability to absorb it without a major hit on profitability. The landlord always assumes his return is going to increase every five years. How many pub businesses show consistent growth over, say, 20 years?

Now, obviously, the landlord deserves an increase in his rental income over a period of time in line with normal pub growth, which will not always be up, and it is here that the partnership usually breaks down.

Normal growth should not include where a tenant, through investment and operational ability, turns a poor site into a success. A tenant should not be penalised for his success. The benefit, in this circumstance, should be heavily in favour of the tenant.

A landlord who has benefited in the past from the growth of a business is unwilling to share in the periods of negative growth. After all, most landlords are protected by an upward-only rent review clause in their agreements.

To appreciate how unbalanced this process is you must look at how the landlord calculates the rent payable. Fundamentally, a commercial lease, one that has no interest in the purchasing arrangements of the business, looks at open market rent. Pubcos, by contrast, work on the principle of Fair Maintainable Trade (FMT). It must be noted that the pubco will argue the open market principle if the FMT does not support its case. Both methods are flawed.

Open market rent looks at who's paid the highest rent in your area for a similar space. It is purely a supply versus demand principle, which is unfair for a mature business. There will always be the situation where rents are over bid in order for a brand to ensure its presence in a location ­ whether to show growth to its shareholders or to meet some market penetration targets. The result is that all the rent reviews that follow see rents get pushed up to this level regardless of their situation.

FMT is based on what the landlord believes your turnover is and what that should produce in profit and arbitrarily assumes a percentage of that as rent. Strangely enough, most landlords believe that the tenant is making more profit than he actually is. It begs the question: why don't more landlords operate businesses directly? They appear on paper to be able to run a far more efficient model. The big problem with the pubcos, which predominately use this model, is two fold.

Firstly, as with open market rent models, it normally takes no account of the risk, investment and skill of a tenant who turns around a poor site. Secondly, it takes no account of the profit made by the landlord on the supply agreement. This is unfair as the landlord will take this into consideration when viewing a tenant's rent bid for a new agreement. So you have a so-called partnership, where a tenant can be forced to produce his profit numbers and the landlord does not. Where is the transparency to build a partnership there?

This brings us nicely to the RICS (Royal Institute of Chartered Surveyors), which stands in judgment when a landlord and tenant can't agree. The process of arbitration is one fraught with technicalities and costs can easily run up ­ £30,000 is not unusual, and if your guess is not the closest to the final award by the arbitrator, you may even have to pick up the costs of the landlord as well.

I believe that arbitrators have no idea what's involved to create a business and how hard it is to generate additional sales to cover their awards. They look at how many inches of evidence are produced by the two sides, look at the bid difference between the two parties and make a slight adjustment in the favour of whoever produces the most evidence ­ and then go down the middle. The decision is binding unless there is a point of law involved, which is even more expensive to prove than the actual arbitration.

All this process does is encourage landlords to make the highest rent bid, pay their experts to manufacture evidence to support this knowing that if a tenant goes to arbitration they will usually get an uplift in their favour. After all, this is their core business and they are professional at producing many inches of evidence. The tenant has to decide whether he can afford to go to arbitration in the first place and, if not, settle at a higher rent than he should, commercially, to avoid playing out of his league ­ and the cost associated with it.

There is a cheaper option on costs that you usually can evoke called independent expert. This option has to be exercised within certain time limits, which are usually breached in the tenant's attempt to negotiate a fair settlement and is rarely encouraged by the landlord, who normally initiates the arbitration process.

It is also true that RICS experts, when not working as arbitrators, earn the majority of their fees from large landlord companies. So, how do they maintain their impartiality?

This article obviously is written in the favour of the tenant and I am one. I have reason to feel this way. Even with the financial resources to employ expert representation I have seen rent increases of 57%, 101% and 188% within the past three years.

Two of these were arbitration awards and one was a negotiated settlement to avoid arbitration. I would like to meet anyone who has the ability to increase sales and, or, reduce costs to be able to absorb this kind of increase. How does an individual, whose home and business is the pub being reviewed, afford the advice needed to enter negotiations with any strength in a process that is weighted against them from the start?

What's the solution? I wish I could give you a definitive answer. I believe the turnover rent mechanism is one possible step forward in some instances. Although you still have to agree a percentage and/or fallback base rent. Removing wherever possible the upward-only rent review clause is a positive step forward, only if the landlord is not allowed to inflate the current rents to justify this!

Introducing some expert retailers into the arbitration process would put some reality into the decisions being made. Finally, ensure landlords have to declare any income they generate from a site over and above the rent, so that a fair financial picture can be achieved and a real partnership approach to dividing this up between the parties can become reality.