As noted in a previous article, tenants and lessees will periodically have their rents reviewed – typically every five years. In some circumstances, tenants/lessees who come under the Pubs Code can request a review at another time e.g. if there has been a significant increase in the price they have to pay for tied products.
The basis for the review will be set out in the tenancy or lease and will assume that the tenant has complied with their obligations and that the property is in good order.
To start the process, the pub company will send the tenant a rent assessment proposal which must be carried out in accordance with the Royal Institute of Chartered Surveyors guidance (known as the ‘Red Book’) and take into account any authorised improvements made by tenants at their own expense. The proposed rent should be based on Fair Maintainable Trade (FMT) — basically an estimate of the levels of turnover and operating profit that a Reasonably Efficient Operator (REO) (i.e. a good-to-average retailer) would be expected to achieve. If the Business Development Manager has been doing their job, the proposed amount should not come as a surprise. For instance, if the FMT is higher than the tenant has been achieving, this should have been tackled at the regular meetings the tenant is supposed to have with the BDM.
Unless the proposed rent is acceptable to the tenant, negotiations will then begin. For tenants who come under the Pubs Code, the review is an opportunity to request a Market Rent Only (MRO) option and that procedure would then kick in — see the earlier Pubs Code article.
Not surprisingly, many tenants will regard the asked-for rent as too high. Large increases are often seen as a penalty for improving the business and boosting trade. They might also point to the fact that rent assessments are carried out by valuers, assisted by BDMs. However, pretty much all valuers and many BDMs will never have run a pub or personally have the experience to qualify as an REO. Many valuer assessments are based on comparisons with physically ‘similar’ pubs but arguably fail to take into account how different pubs are from one another in terms of trading area, staff availability, competition etc.
Tenants often engage the services of licensed trade surveyors or valuers to assist with negotiations. Such expert help is invariably very useful though it obviously comes at a cost.
Should agreement not be reached, then the Pubs Independent Rent Review Scheme (PIRRS) offers a ‘low cost’ dispute resolution service. An independent expert valuer will be appointed and both parties will agree to be bound by the valuation delivered.
Rent reviews often coincide with tenancy/lease renewals and, recently, there has been an increase in pub companies declining to renew agreements. The Landlord & Tenant Act 1954 establishes the grounds on which companies can oppose grant of a new lease, one of which is that they intend to occupy the premises as ‘a business to be carried out by them’ i.e. take it into management. This seems to happen most often when a tenant has indicated that they plan to use the rent review ‘trigger’ to pursue an MRO option. In other instances, the tenant has built up a successful business and the suspicion is that the company wishes to capitalise on this success by taking direct control. We’ve seen in an earlier article how some companies have been increasing their managed operations, either through traditional managed pubs or the new-style Retail Agreements. In these circumstances, the tenant is entitled to compensation though this usually does not amount to a great deal.
Another ground for rejecting renewal under the Act is that the company intends to either redevelop or substantially alter the premises and cannot do so with the tenant in occupation. A recent court case made clear that the intention must be ‘settled, firm and unconditional’ i.e. it would have been carried out anyway if the tenant had left of their own free will.
Other grounds for rejection include persistent delays in paying rent, failure to undertake repairs for which the tenant is responsible for and other substantial breaches by the tenant. The second of these is an issue that regularly arises, and we’ll cover ‘dilapidations’ in the next article.
Finally, it’s interesting to note that one regional brewery, Hall & Woodhouse, scrapped rent reviews altogether in 2010. Instead, they have three-year renewable Partnership Agreements in which rent rises are linked purely to inflation.
Paul Ainsworth
Paul Ainsworth
Paul Ainsworth
Paul Ainsworth
Paul Ainsworth
Paul Ainsworth
Paul Ainsworth
Paul Ainsworth
Paul Ainsworth
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