A POLICY OF INTENDED FINANCIAL DISTRESS? 

Updated: Jun 1


There is no doubt that we are in the eye of an economic storm. Probably the worst for a generation sparked by the pandemic aftermath and the Ukraine war. Like all other professional advisors involved in rent review and lease renewal, we are in the business of prediction.


Looking into the future is at the heart of what we all do. Tenant’s valuers will at times, for all good reasons, overpitch the negatives but sometimes get it wrong. In like vein, and very much more regularly, the Landlord valuers will often vastly underestimate, or ignore the reality of true viability, and champion positives that just do not exist to the extent they believe them to. To both sides, it is a matter of educated speculation.

What is at stake is the tenant’s future, their livelihood and not to be forgotten, their sanity. Running a pub, as our Directors Simon Clarke, and separately David Morgan, know first-hand, is a stressful all-consuming affair with endless cost pressures but much satisfaction and enjoyment. So, what do we know at present?


The Bank of England has warned that the UK economy might slip into recession territory later this year as energy prices push inflation above 10% in the fourth quarter of 2022, something that has not been seen in forty years. This will contribute to the worst squeeze in household finances for decades.  

On the 5th of May 2022, the Bank of England raised interest rates to 1% up from 0.75%, its highest level for thirteen years.

It has been an ever-growing debate as to whether the standard new lease should have a requirement for the inclusion of index-linked reviews. So many current leases are linked to annual increases in RPI, why not be consistent and just follow on? As a gesture to the inevitable, we have the growing accommodation that the RPI annual increases should be capped and collared.


To explain, this practice sets fixed lower and upper limits within which annual increases can move. Not all Pub Co’s are in favour of new leases being the subject of RPI. For example, Star Pubs & Bars removed RPI from all new tied agreements citing under their ‘fixed rent promise’ that the removal of annual index-linked reviews would ensure business certainty and ‘one less headache’ for their tied estate. We have researched and reviewed the major Pub Company websites to compare the position of index-linked reviews concerning new tied agreements (tenancy and lease).



For the majority of free of tie (MRO) leases, the favoured approach is a 2% (collar) and 5% (cap), which poses an alternative to upward only open market rent review adopted by some other regulated Pub Co’s. In recent times we have witnessed lower caps of 4% being accepted.


But hold on a minute. What’s fair for the goose is fair for the gander. The Pub Co is protecting shareholder values for sure but what of the tenant? The assumption used to be that the tenant could always increase profitability in line with RPI but that is now definitely not the case. Sales may well go up as cost pressures are passed on to the customer, but expenses have rocketed. So, net income has gone down. We know this self-evident truth. The Pub Co’s through their managed houses also recognise the same reality.


Is this a deliberate move to cash starve the lessee throughout the lease duration? Even at a cap of 5% on RPI, will total sales and profits increase at the same pace each year?

So, we have a battle on our hands (yet again). Will the Pub Co’s holding out for annually indexed rents, even with cap and collars, knowingly and willingly let the charade continue realising that RPI rent increases year on year will penalise their tenants, their so-called business partners. This is not just us ‘having a go’ but cold harsh reality. Never have we felt more passionate about an issue because it is a brush with a self-fulfilling certainty. Not guesswork.


To a degree, the market is being talked up by many who should know better. “Inflation won’t stay this high forever” - “People forget” - ”We all get used to price rises in time” – “It may be a blip for a year but that’s it” - “Covid is yesterday’s news”. We have heard them all from time to time in the justification of eye-watering rent assessments linked to rent review or lease renewal. Our solid streak of reality takes a more sensible long-term view on viability. For that matter so should the Pub Co’s - with the exception of Star Pubs & Bars of course!


We hope that sanity may prevail otherwise there will be even more hapless new lessees being forced to throw in the towel.


If you would like to know more about how Morgan & Clarke can assist further and anything else linked to your next move, please feel free to contact us on either 020 8103 3904 or by email at info@morganandclarke.co.uk.