The limits to pubco giving
Trying to broker an agreement with the parties involved in mediation talks between pub tenants and their landlords was described by one observer as "like herding cats".
Little surprise that talks broke up without consensus. We all know the dispute is essentially about money. It would be impossible for the pubcos to concede to demands that threatened their business model. The big gaps between pubcos, which won BII and FLVA support for the changes they will make, and other parties — now in a new body, the Independent Pub Confederation (IPC) — related to big-ticket items that risked the destruction of their businesses. At the very least they risked a fragmentation of the uneasy consensus between, say, Enterprise and Charles Wells.
From a pubco point of view, the sticking points in the IPC wish list were the removal of Retail Price Index (RPI) clauses, the right of lessees to be offered a free-of-tie option and an end to machine ties on long leases.
RPI rent increases can cause a lessee's rent bill to rise 15% to 20% in a time of medium inflation. JD Wetherspoon refuses to sign leases that have RPI increases between five-yearly rent reviews. Batemans has yearly RPI increases, but no rent reviews. But it seems to me that asking for RPI clauses to be removed "by deed of variation" is a non-starter. That's not to say sensible tenanted operators need not be wary of their effect on good quality tenants. New tenants, given market conditions, should negotiate RPI out of leases they are looking to sign.
But existing tenants, who happily signed up to RPI leases, can't expect landlords to forgo the right to impose a contractual term. It would be asking the pubcos to give up the growth in income they may be entitled to, given the return of inflation and decent trading, when they're also conceding income lost in poorly-performing pubs.
Likewise, tenanted pubcos sensed danger in agreeing that "all lessees should be offered a choice of being tied or free". For brewing tenanted pubcos, it would mean potential loss of huge amounts of margin and a real threat to their future. Punch and Enterprise will be minded to offer more free-of-tie leases over time. But it would be impossible for them to rentalise their scale benefits and, given their debt levels, this concession spells share-price disaster.
Machine income is especially fraught. What's been conceded is the end of double-counting tenants' machine income (collective hanging of heads in shame that it's taken so long). Pubcos believe, though, they add value, and agreeing to an end of the tie would soon see a tenant's income diminish.
Mediation wasn't a waste of time. The many promises made by tenanted operators are to be welcomed. And to please the most vocal dissidents, last week the Royal Institute of Chartered Surveyors promised to shine light on the opaque world of rent-setting.
