The problematic Prime Principle

“May I ask why?”

“You have bought an economy ticket,” was the response.

“Have you never heard of Fair Pint, Brian Jacobs and the Prime Principle?” I demanded. “All I am requesting is that no-one in economy should be any worse off than in business class! Look, I am 6ft 1” and in economy I am tied to 32” leg room and have far less choice for films and music.”

“But that’s what you paid for,” replied the KLM representative.

This simple parody sums up how many see the argument of free-of-tie v tied. However, we do have hundreds of publicans who, as many admitted on a recent visit to the House of Commons, have simply committed the crime of acquiring a pub they clearly love in an optimistic desire to return it to its former glory.

Is it really their fault that:

• Beer sales in pubs would continue to fall as they have every year since 1989.
• We would experience the worst recession since World War II.
• The then Labour Government’s flexible smoking legislation proposals would be scuppered by GMB and others to ensure a full-scale smoking ban.
• Business rates would be set on trading levels before the ban impacted.
• Margins would be suppressed with duty and price rises having to be absorbed.
• Energy costs would soar.
• Other overheads would also rise, for example staff wages - but nowhere near where the GMB say they should be!
• The collapse of the lease assignment market.

Are falling sales, rising costs and reduced margins the ‘perfect storm’ of despair? I can sympathise why such licensees would wish to obtain extra profits by opting out of the tie to meet their obligations.

However, there are some myths regarding the notion of tied lessees being no worse off than free-of-tie ones. Nowhere - despite GMB claims - does it exist in RICS guidelines.

Indeed clause 7.21 makes it clear that such comparisons are problematic. When Brian Jacobs tried to introduce the ‘prime principle’ in a court case what was the result? The QC’s comments on his evidence were embarrassingly scathing (Brooker v Enterprise Inns 2009).

Let us though analyse free-of-tie standard lease full repairing/insuring agreements. What are the pros and cons?

Advantages​

• Cheaper prices and more profitability despite higher rents
• Greater choice
• Probable increased value of assignable agreement

Disadvantages​

• Upwards only rent reviews
• Full put and keep repair liability (Typically £10k spend a year)
• No protection against building insurance charges (typically £4.5k pa)
• No discretionary support - Punch and Enterprise alone have given just under £100m in the last four years
• No surrenders allowed
• No Code of Practice rights
• No access to PIRRS, PICAS etc.

What you cannot compare, although the GMB union will try, is free-of-tie leases with traditional tenancy agreements. The notion that tenants should be able to opt-out of their purchasing agreements from a landlord who provides support, repairs, lower rents and signage and exterior decoration is totally unreasonable.

I am under no illusions that the GMB would see British jobs lost and our heritage family brewers destroyed if that’s what it takes to bring down a certain Solihull-based company.

In my opinion the issue is about the price of tied products. With overheads at 32-40% of turnover, rents at 8-12% then profit margins for tied, especially wet-led agreements, need to be at least 50-60% overall with beers around 50% minimum for repairing agreements.

If you are paying full wholesale prices then you need to charge £3.40 a pint for bitter, £3.90 lager, £4.10-£4.30 for premium products, including VAT. These are simply not attainable or indeed sustainable in large parts of the UK. All ​tied landlords should ensure they pass on sufficient discounts to ensure adequate margins for their tenant/lessees to make a decent living.

Those licensees who need more advantageous terms are the ones on tied long-term repair agreements. Companies such as Greene King, Stars Pubs and Bars, Admiral, Marston have around 20% of their estates on FRI Leases. With Punch and Enterprise it’s around 60% and 70% respectively so the vast majority of these agreements are found in just two companies.

Can they afford to share more of their profit? Faced with potential legislation that may irreparably damage the entire sector, can they afford not to?

Phil Dixon is a pub industry consultant​