Rent reviews can be fraught. Enterprise Inns lessee Gerry Price reflects on his recent experience at the Inn @ West End.
About the pub
The Inn @ West End is a small, unremarkable property on the A322 between Bracknell and Guildford.
My wife and I took a 30-year lease, tied for beers and ciders only, on February 14th 2000 with an annual rent of £34,000 and a three-month rent -free period. It had five year upward- only reviews in the lease and at our review in 2005 the rent had risen to £44,000. Over the past 10 years we have invested more than £100,000 in the property and made the Inn into a successful food-led, restaurant/pub, which has won numerous accolades and awards.
Formally starting the review
On April 1st 2009 I received the letter from Enterprise Inns that formally began the rent review process for implementation on 14th February 2010. I was pleased that the starting pistol had been fired at last and started to prepare by finding out the level of some other local rents, reading every article around about how rents are calculated and bracing myself for what was to come.
I remained braced for nearly two months and eventually called my area manager. I suggested getting together with his fair maintainable trade and profit & loss for the pub, together with his proposed rent reduction. He seemed surprised when I mentioned reduction and I took umbrage. I reminded him that rents could now go up or down, that this was a review to find out what someone would be prepared to offer for the pub in its 2000 condition, in the current market, where commercial rents had fallen about 40% and that I was serious. I wasn't rude and felt that our talks took on a more businesslike mood.
Soon after, I attended the BII Rent Review Roadshow at Brooklands and learnt a lot about rent-setting and how to handle a rent review. Barry Gillham gave an excellent presentation, which was a re-run of an article published in the BII business magazine of January 2009. For the first time I felt there were some sort of guidelines to help establish what a rent should be. I didn't like the way tenants improvements were dealt with financially, but at least they were dealt with.
Verbal negotiations continued for some time with suggestions of full ties, annual RPI clauses and a visit with the area manager's boss at a very inconvenient time. I raised this last point politely but firmly in an email as a way of reminding him that I took this negotiation seriously and wanted to give it my full attention.
Playing for time
When the area manager, his boss and the national rent controller worked as a troika to bounce off each other, I created a very dominant wife (which she isn't) so I could say things like: "I can't see her letting me accept that".
It prevented confrontation and allowed me to play for thinking time. At all times we were civil and businesslike.
Around the start of July my area manager said the national rent controller had decided to have a third- party valuation at their own expense. I felt I should do the same and contacted an agent to do so.
This turned out to be £1,850 well spent as I was able to seek advice from two surveyors without their formally acting for me. Subsequently, the area manager said they had decided not to have the third-party valuation anyway! Was this a little ruse on their part? Call me cynical if you like!
From the end of July there was a two-month pause while we attempted unsuccessfully to buy the freehold. Finally on 27 October, I received a hand-delivered letter from a clearly embarrassed area manager, suggesting an FMT higher than we had agreed and a rent increase of £8,000 to £52,000 — an 18% uplift.
Using my new-found calculation from the BII article and roadshow, I reduced their FMT turnover to one that the area manager and I had agreed previously, plus the gross profit margin; introduced an allowance for stock and inventory and increased the allowance for tenants' improvements.
I ran it by my informal chaps and it resulted in a £24.5k offer.
I took the view that they would say "Don't be daft" — to which I would reply: "Well, you started it!"
At another meeting, in December, the area manager said he thought they might agree 39k, but the offer was not formal, and in my written reply I put it on paper as a marker. Most of our differences related to gross profit margin, tenants' improvements and capital, and the split of divisible balance.
At this point things got a bit technical relating to the tenants' improvements calculation and it was suggested that because of this, the new, low-cost, PIRRS scheme could not be used because there was dispute over a legal matter, and PIRRS could not address legal matters. Subtle pressure was applied by suggesting that they might start all over again, all previous discussion having been "without prejudice".
I was told in writing that I would now be dealing with the national rent controller directly and he was thinking of appointing so-and-so to conduct an independent review. I think I'd heard that one before!
Risky business
I wrote to the national rent controller, saying I wasn't going to battle with him in court regarding calculation of the allowance for tenants' improvements, as he clearly knew more than me, but that there were other issues relating to turnover, GP and divisible balance that needed discussion.
Aware that I was risking my unwritten offer of 39k, I called the rent controller on his mobile to discuss the matter. In a friendly and constructive discussion I said their final offer was 39k, while mine was 34.5k — so why didn't we meet somewhere in the middle? He seemed to think that was a sensible suggestion but once again bounced me back to the area manager as he "didn't conduct rent reviews".
A couple of days later, in a memorable mobile phone call outside the Snooty Fox at Tetbury, the area manager called and said he understood I had offered £37k.
I said no — that I had suggested we meet somewhere between £34.5k and £39k to put the matter to bed. He said how about £38; I said how about £37.5k, and we agreed verbally.
With a great sense of relief and a certain sense of bravado I said: "That's good — we can celebrate 10 years at the Inn on 14 February, knowing what's going on. Have you any money in the marketing budget for tenant support?'
"How would £200 towards the celebration be?" says he. "That'll do nicely," says I. He was obviously as happy as I to move on.
So what was my feeling about the rent review?
There is always a sense of David versus Goliath about a rent review. Enterprise probably carry out more than 1000 rent reviews a year, and I carry out...er...one every five years! Inevitably a landlord would like as much rent as possible and the tenant would like to pay as little as possible, so conflict results. In resolving it amicably, information is crucial, especially when it comes to comparables and commercial rental calculations.
A rent review is a hard-nosed negotiation, where you both use all the ammunition you have available, but it should not become personal. They ask for figures: you decline politely. They ask for RPI: you decline politely; they suggest they will get an independent valuation: you get one. You need to be professional, especially if you don't use an advisor.
The tough get going
In this review, they took a bit of persuading that trading is incredibly tough at the moment, and that if you are doing reasonably well you are working incredibly hard to do it and it is costing you margin somewhere — in lower prices, more promotional spend or both. Oh, and you're probably doing a lot more hours yourselves to save money.
But having been in the trade a long time, I knew what to expect and was able to battle logically and reasonably. Both the area manager and national rent controller were polite and reasonable and I hope I was the same.
In an article in the Morning Advertiser published last July, T