The tied tenant should be financially no worse off than the free of tie tenant — that is the key finding of the Royal Institute of Chartered Sureyors (RICS).
The RICS forum to look at the fairness of rent setting endorsed the key principle of the 2004 Trade and Industry Select Committee report — one that anti-pubco campaigners claim has been ignored.
The RICS report also said that it had never endorsed a 50/50 split of profits and that the recent Brooker case had provided "timely guidance". In the Brooker case, the rent was set at 35% of the divisible balance (High Court gives hope for rent cuts).
It has vowed to undertake a review of its valuation paper, which provides guidance for rent setting. "This follows the principle of the tied tenant being no worse off than the non tied tenant; a position which is arrived at with a correct interpretation of RICS guidance," it said.
The review will focus on:
• What comparable evidence can be used.
• The concept of "the reasonably efficient operator" making a clear distinction between what a tenant can afford and value.
• Advice on whether key data such as industry average statistics, for example on turnover, can provide a check and balance to the profits method.
It said: "RICS does not, and has never has endorsed any particular split of divisible balance; RICS guidance seeks to address the factors to be taken into account to assess an appropriate division of profit and reflection of risk.
"The Forum suggests that the recent Brooker v Unique Pub Properties Ltd. case has provided timely guidance on this point."
Perception of bias
RICS also said it would look at the make up of its Trade Related Valuation Group, which sets the guidance on rent setting, as "representations to the Forum showed that there was a perception amongst some interested parties that this Group has a bias towards pubco landlord interests".
RICS will draw up a new code of practice, which it hopes the industry will adhere to at rent review and lease renewal time.
It calls for:
• The method of how rent is to be calculated is to be drawn up at the start of the lease using the profits valuation method. It will state which items are to be rentalised and excluded. It will also deal with tenants' improvements.
• A list of minimum information presented by the landlord at rent review time.
RICS found, however, that there should be no national rent register for pubs because it is not a "realistic" or "achievable" goal.
But RICS does suggest establishing a database of key financial variables to estimate Fair Maintainable Trade and the divisible balance.
"This database will only be successful if both landlords and tenants are prepared to cooperate fully and submit sufficient accurate data, so that a critical mass of data can be achieved," it said.
"RICS and the Forum believes that benchmarking by the industry will give greater knowledge and improve the transparency in the calculation of rental value at review.
"Data would be available to benchmark and substantiate the components of the FMT calculation. It will help define more readily the concept of "a reasonably efficient operator".
"It would also provide a basis to demonstrate the rental difference between tied and non-tied tenants and allow for an evidence-based approach to the appropriate split of the divisible balance."
Fair Pint reaction
"Our campaign has been instrumental, along with the ALMR and others, in lobbying the RICS to respond pro-actively to the findings of the Business & Enterprise Select Committee," said Fair Pint founding member Karl Harrison.
"We're pleased that RICS has put in so much effort to look at the issues.
"It now appears that the RICS, and a leading property lawyer, agree with the Fair Pint Campaign that a rent review should leave the tied tenant no worse off financially than the non-tied tenant.
"This is the prime principle. It's so important to pub tenants to see that the RICS does not endorse the 50/50 split of the divisible balance, as so often claimed by landlords to be the norm.
"It's very important also that the RICS has attached weight to the 'Brooker Case'.
"This judgement makes it clear that the tenant's rent bid will be effected by all of the risks facing the tenant, and that the landlord's share of profit ought not to exceed 35% at this time."
The newly formed Independent Pub Confederation (IPC) fully supports the findings.