Consequences of bad pub estate management

David Morgan of Cookseys DMP and critic of the large tenanted pubcos describes what he comes across in his professional role.

Breaking up is so very hard to do... I'm showing my age with this key line from a song by the Walker Brothers, way back when there were only three television channels to choose from.

My comments are prompted by a continuing series of cases of hardship that I have picked at random, all from the month of October this year. Names and addresses have been omitted for confidentiality, but all the examples are real cases.

Every phone call, be it a hardship case, standard rent review, or code-of-practice rent review application always instigates a free-of-charge case study.

Great detail can be achieved in 20 minutes or so of probing over the phone. You try to get to the bottom of the issue and tease out the facts to see whether or not there is a solid case to pursue.

Surprisingly, up to 40% of initial referrals do not get much further if what we call "basic strength of case" is not established. Nobody goes into the pub business with the intention of failing. Owning up to personally-induced failure can be life shattering.

Living with failure brought on by poor estate management from the pub's owner is a different matter. In fact it is inexcusable. Human nature dictates that there are many shades of grey. Few, if any, supply-tied lessees score "the perfect 10".

Bearing this in mind, it is quite unrealistic to hope that anything less than the best is somehow not good enough any more.

I marvel at the skill, expertise, dynamism and sheer hard work of the top 30% or so of lessees that, in my view, are still making a very good living indeed, despite the smoking ban, the recession, cheap supermarket booze, excessive taxation, the beer tie, financial constraints and anti-pub health diktats.

The problem is that of the 23,000 supply-tied lessees in the country, anecdotal evidence suggests 70% are not in this success bracket; this means some 16,000 pubs are not doing so well. What's gone wrong? Why have often experienced, hardworking lessees ended up on the scrap heap of crippling financial loss, personal desolation, and, worst of all, total lack of motivation.

My own background in the trade started with Courage (Western) in the mid 1970s. The culture was totally different right across the board. You would scarcely credit the genuinely caring nature of the brewer, even a national one, for its tenants.

We had a few smaller pubs (all under 125 barrels) that I sold off in the late 1970s and which are still, to this day, mainly freehouses. Ironically one or two, which were subsequently sold to pubcos and returned to the fold of supply-tie, have been closed. The rest survive. The seed corn of the pub business is its people.

The rationale that a property company can run a pub estate as you would for shops or offices is downright wrong. A standard property company just takes rent. No more, no less. They don't normally provide the goods being sold or the people to staff the business.

They are totally separate from the operational control and this, in my view, is what is destroying the 70% of the trade that is not in the "perfect 10" league. Brushing over pubs that are "unsustainable" by blaming the inadequacies of licensees who are incapable of trading through the downturn can mask issues of product cost (the tie) and affordability (the rent).

For inadequacy read lack of motivation. It is very difficult to have profound long-term commitment if you are trading at a loss, living off your savings and maxed out on your credit cards. Being encouraged to spend yet more money (that isn't there) on advertising, redecoration and menu changes is scarcely a credible option in reality.

Remarkably, lessees don't start their occupation of a pubco lease wanting to break the tie. The Brits are, by and large, a fairly law-abiding bunch. That is the way of our society.

Unlike, for example, eastern Europe, where even the lifting of Soviet-style rule has not changed the culture of automatic evasion and lying to anyone in authority. We just aren't programmed that way.

Buying out​

Enter the enforcer, Brulines. A solid way to control and clamp down on buying out. The pubcos are utterly dependent on beer sales by volume (the brewers' wholesale contribution), which, together with rent, is the only way to service their monumental debts. Flow monitoring is perfectly legal, if the lease provides for it.

Its use is championed as a management tool (although the jury is out on that one). I cannot find any lease that says the kit will be used for the purpose of fining.

It would appear that Brulines may not always be 100% accurate. Indeed, others may claim far stronger views over accuracy (there is court action to come over the next six months or so). A case in point — a lady lessee absolutely adamant that she was never buying out is hit with a £4,000 fine.

The first she knew was when the rent wasn't paid from her direct debit rental account as the fine was taken from that account without her consent. Her beer order then went on stop. What does she do?

No trade because no beer and, as sure as night follows day, she actually has to buy out to keep the pub open and trading. There were foreign kegs found in the cellar because she had four cellar inspections in nine days. She signs a "confession" and asks for an explanation of how the fine was calculated.

The pubco's solicitors tell her that it is up to her to prove by invoices and delivery notes that she was innocent in the first place. She has to prove her innocence, not they her guilt. Forfeiture proceedings are now in hand.

It is not legally correct to take monies out of a direct debit rent account without prior approval of the account holder. If a fine is taken by that route from the direct debit rent account the money can be reclaimed in full from the bank utilising the bank's direct debit guarantee scheme. If no authorisation was given, the money must be returned by the bank, not the pubco.

Giving up​

Giving up a pub has sometimes been likened to taking one's terminal breath. You hang on until the very last second hoping something will change.

My sympathies went out to a Cheshire lessee with 17 years' experience who had only kept his business alive by pumping in £50,000 from a cashed-in ISA. That has all gone in the past 12 months. Nothing left. Then there was the single lady lessee who surrendered her lease, which had a rent of £48,000 (only reduced on a concession and then back up to the original level).

The new occupant is on a tenancy at will at a nominal £50 per week. The pub is being offered (ironically to a distant friend of the single lady) at exactly half the original rent. How this can be sound estate management, I don't know.

Dilapidations​

There is a pub in the Midlands where three months notice of surrender was given by the lessee. The inventory was assessed by the pubco at what appears to be matchwood value. Nothing was said as to the procedure for day of change.

The regional manager turns up on the day, announces a fine of £8,000 for the surrender and presents a dilapidations schedule that, in the pubco's unchallenged view, shows wants of repair of a further £14,000.

The security deposit, stock at valuation and inventory value are all wiped out, and a temporary manager is installed.

I am staggered by the churn rate in some of the major property companies that own pubs. None of the above show up as closures — in fact, as statistics they don't exist because churn or business failure rates don't get published anywhere.

Poor estate management runs rife and appears to be destroying the supply-tied public trade by a thousand cuts.

Radical change​

It is easy to say that lessees hang on too long, but time and again they are illegally encouraged to do so.

A couple in a Somerset pub phoned their pubco to say that they will have no chance of paying for this week's beer delivery. |