The Royal Institution of Chartered Surveyors (RICS) is heading a drive to make the process of setting pub rents clearer and fairer for tenants after strong criticism from MPs. John Harrington reports on progress
David Rusholme, director of RICS Valuation Professional Group, has a big job on his hands. He's heading the bid to bring clarity and fairness to the rent-setting process after it came under fire in last summer's Business & Enterprise Committee (BEC) report into pubcos, which stated: "Neither the pubcos nor RICS have taken any serious action to make sure the rental system is not unfairly biased against the lessee."
Action was agreed in October, following a wide consultation, in the form of the Pub Industry Forum Report and Recommendations. This committed RICS to:
• Draw up a new code of practice for landlords and tenants and rent review and lease renewal
• Review its Valuation Information Paper 2 (VIP2), used to make rent calculations
• Make new appointments to the Trade Related Valuations Group to combat "perceptions" of pubco bias
• Champion the creation of a new database of "key financial variables" to calculate Fair Maintainable Trade (FMT) and the divisible balance.
Speaking at the BEC (since renamed Business, Innovation & Skills Committee) hearing in December, Rusholme said the code should be ready by April or early May. The Morning Advertiser caught up with Rusholme, and RICS associate director John Anderson, to discuss the progress.
Morning Advertiser: What are the latest developments around the guidance on rent calculations?
David Rusholme: VIP2 is an information paper. What we are now going to do is to make that advice into a guidance note. A guidance note is different in that a guidance note is best practice. What we are saying is, if you are a surveyor in that sector you have to abide by the guidance note. We are upping the status of the guidance in the whole sector and I think that's quite a big point.
To achieve all this we have convened a working group of 10 to 12 industry leaders. We have a group of three — Martin Willis of Fleurets, Gareth Jones of Colliers, David Butters of Gerald Eve — who will be co-ordinating the writing.
In the rest of the group (which has met twice) we've got representatives of the Association of Licensed Multiple Retailers (ALMR), Independent Pub Confederation (IPC), British Beer & Pub Association (BBPA) and Fair Pint, and a cross section of surveyors on both sides of the fence. We try to draw everyone under one umbrella and get all the views together and feed that onto the guidance.
John Anderson: We should have some guidance ready to go to a wider consultation, probably around Easter. We want to have something published and out as quickly as possible. I think the promise we made to the select committee was around May and we're on target for that.
It's all about bringing people together rather than having things ending up in big disputes. I think that's been the problem in the past.
DR: Particularly when surveyors haven't been involved in the past.
MA: That leads to another question: should BDMs have a place in rent reviews?
DR: When we did the forum report last year, so many people said that when surveyors are appointed to act on both sides, things are very quickly solved. It's when surveyors haven't been involved that you are getting into these disputes. It's a difficult one. If we just sit here saying you should use a surveyor it just sounds like a big advert for the RICS!
JA: I think the crux of the problem in the past was that a lot of tenants have failed to take appropriate, professional advice as they've gone along, when they take leases or had rent reviews.
DR: It's a good example of something that should go into the code of practice: when a pub is let the tenant should be given expectation from the landlord that you are going to face a rent review in five years' time and it should explain the consequences of that — that you should budget into your business plan to get professional advice at that stage.
The pub sector is peculiar in its past. It's the one sector that has really failed to engage with the surveying profession, as it should.
You asked a very direct question about BDMs. Our answer is that rent reviews should be conducted by people who have appropriate training and knowledge, whether it's a BDM or chartered surveyor. I have my doubts whether a BDM has the knowledge to do the job effectively.
JA: In the olden days a lot of reviews were carried out by estate surveyors, and in an effort to cut costs a lot of estate surveyors were let go and it was felt perhaps we can give this to BDMs and expand their remit.
MA: What are your views on the BBPA's Pub Industry Framework Code of Practice? Critics have said it doesn't have enough teeth, some edicts are vague and there aren't enough proper sanctions in it.
DR: The code is probably not the place to best represent all the property elements, which is why we want to develop a separate code. So much of the BBPA code goes on gaming machines and other matters; that's not really within our sphere. It's clearer to separate out the property measures from the rest of it and I think it has more chance that way.
JA: And certainly that's what the BIS Select Committee want us to do.
MA: What is the latest on the benchmarking scheme?
DR: The ALMR is looking like it wants to open up its system, which is something we encourage. I think we also detect a change of mood among the pub companies, which see the benefits of having a form of industry bench-marking that helps in the rent setting process.
The big obstacle has always been confidentiality of data. That cuts both ways — for the landlord and the tenant. I think we can demonstrate there are options out there for a bench-marking system that can work effectively and still preserve the confidentiality of the individual trading accounts of any particular pub. Getting over that hurdle has been a huge step forward.
We are having discussions with a number of commercial parties from the bench-marking world and we are very confident we can bring parties all together on that.
MA: Do you have a timescale of when the bench-marking scheme will be in place?
DR: It's not for the RICS to deliver. We just want to facilitate it. Something will happen and it will happen within months.
MA: What is your view of PIRRS (the BII-led low-cost rent arbitration scheme)?
DR: I think we may have failed in the past to get over in the pub sector that we have a hugely-effective arbitration system in place (RICS' Dispute Resolution Scheme). If you look at PIRRS, once they've perfected the thing it might look pretty close to what we have here in the first place. There's got to be alternatives and we welcome alternatives in the sector.
MA: The "USP" of PIRRS is that it's a lot cheaper.
DR: The cost of the RICS scheme has been overblown from a lot of the pressure groups over the past few years. Yes, if there are big legal issues then costs start to escalate, but that is the same on a PIRRS referral. I don't think there's a huge difference between costs on the RICS scheme and on the PIRRS scheme. I accept we are not cheaper, but it's not prohibitive.
JA: It's a myth that has grown up. It's a bit like the 50:50 divisible balance split (on earnings per pub between landlord and tenant). That was never stated in any RICS guidance.
MA: We hear of some BDMs using the cost of RICS arbitration as a threat to charge higher rents. Do you think this been the case in the past that some parties have promulgated this "myth", as you say, about the cost of it?
JA: That may have been used in the past when there was potentially unequal bargaining power. But I just state again: take appropriate professional advice.
DR: Get a surveyor. Get tooled up! This idea of twisting the arm at arbitration; this happens everywhere in th