2020/NO.15 - Rental valuation is a simple concept being an agreement between two parties. The Landlord and the Tenant, with the rules of engagement being the lease. There are basic understandings in all modern hospitality industry leases, and specifically pubs, namely vacant possession, the disregard of goodwill, and the tenant in occupation plus the concept of a willing landlord and a willing tenant. Valuers are charged with the duty of reflecting market forces and projecting ahead. This links with the concept of Fair Maintainable Operating Profit (FMOP) as defined in the RICS Guidance Notes... All fairly straight forward, or is it?
We have a number of ongoing current cases with Pub Co landlords (no names, no pack drill) that either seek to ignore COVID-19 or massively downplay its effect. One of the old rental valuation chestnuts put forward is that of the necessity of comparable evidence. The links with the granddaddy of such guiding cases O’May V City of London Real Property Co Ltd (1977) 1 EGLR.76. There is then a link to Section 34 of the Landlord and Tenant Act 1954. Problem….There are no current comparables of open market lettings negotiated and agreed post-March 23rd (Lockdown Day). A rather dim attempt has been made to go back and rely on evidence pre-March 23rd. This is both misguided and misleading. It certainly does NOT look forward as required by the RICS guidance Notes, it reflects the way we were NOT the way we are.
The people we are dealing with, presumably under orders from higher levels of pay grade, are trying to push water uphill. They are attempting to either keep rents the same or incredibly, increase them higher than the passing rent. The defence is that “we must preserve shareholder value”. All very well but killing the goose that lays the Golden Egg is so short-sighted. Almost always pub leases have very tight user clauses. Pubs being closed by Government Order although temporary relief does thankfully seem to be on the horizon for external trading areas such as beer gardens. Pub rents are linked to sales which links to profits. Forecasting falls in profit levels is a heady business but for sure they will fall. To infer otherwise is plain daft despite the stipulations of Section 34 of the Landlord and Tenant Act 1954 - more of that another time.
We do not see things getting back to anywhere like normal, if indeed they do, for at least a couple of years. We have built that into our COVID rent calculation model. Logic and statistics dictate that there has been an irreversible change in social attitudes towards the pub and restaurant trade. We are indebted to the daily Propel newsletter for the following statistics produced by CGA and Fourth. They found in their latest Business Confidence survey that only 22% of those surveyed would be comfortable eating/drinking out as soon as restrictions are lifted. 120 Operators were canvassed and amongst other things confirmed;
(a) Decreased visit frequency 71%;
(b) reluctance to visit town and city centres 67%;
(c) an increased desire to “Support local” 52%.
To ignore facts and data of the current market forces and to not realistically forecast profitability is seen as folly. Disregard that concept at your peril…We don’t.
To quote the first verse of “The Way We Were” (Bergman/Bergman/Hamlish)
“Memories light the corner of my mind,
Misty water coloured memories of the way we were,
Scattered pictures of the smiles we left behind,
Smiles we gave to one another for the way we were”