2020/NO.08 - We have regularly revisited clients who have successfully been able to go free of tie (FOT). This opportunity has only been available since the start of the Pubs Code in July 2016 and has had a very slow take up. Hardly surprising as the last thing the Pub Cos wanted was to be shorn of the solid income base from their tie. The Pubs Code was ambiguously worded and fully exploited by the Pubcos in a skilful damage limitation exercise. Currently there are naysayers wringing their hands saying “You should have known better and stayed tied”. We disagree because what has been forgotten is emotion. Real feelings with which we directly connect. M & C senior staff members such as Simon Clarke still has very close connections with The Eagle Ale House, Battersea. David Morgan, albeit a while ago, was fully involved with both the Crown at Frampton Mansell and the Stirrup Cup, Bisley. Charlie Wright has been through the mill in many catering kitchens. We are the ONLY firm of Chartered Surveyors with direct hands on trade experience. Which comes back to emotional understanding rarely even comprehended by specialist valuers on both sides of the fence.
Two examples…A wet led £500K turnover tied estate style Pub Co house south of the M4. Application made for MRO last year. All of a sudden a staggering change in attitude from the Pub Co. Surprise surprise ! The previous discount of about £36 per barrel shoots up to £125 per barrel linked with other goodies. On paper this looked to be a very doable deal with huge uplift in bottom line profit. We sat down with the tenant and on balance recommended that the ‘stay tied’ offer looked very attractive. Looking us in the eye he said…”you don’t get it do you. You really don’t. I want my freedom, I want it so much I can almost taste it”. Accordingly we are in the process of getting the very best FOT rent deal we can but everything is on hold in accordance with the Pubs Code Adjudicator (PCA) directive until 30th June.
Second Example…Long hard series of negotiations following an Market Rent Only (MRO) application for a locals boozer in suburban Sheffield. All successfully concluded last year with our client phoning to say thanks and remarking…”You just don’t know how good it was this morning, now that it is all over, at last I feel free”. Because it is mainly wet led, profitability has soared linked with an affordable FOT rent.
Whilst it must be the objective of every Pub Co and Brewer to have a close business relationship, often put forward as being a business partner, the one thing above all else is the dislike of a big brother looking over your shoulder. This is particularly evident with Pub Cos and much less, indeed if even at all with family Brewers. No problems with fully honouring tied lease provisions but there was always Brulines/Vianet flow monitoring in the cellar to “assist with cellar management”. Telling you the trading hot spots and most used lines, as if you didn’t know ! Big brother again. Thinking of going free of tie was almost looked on as being “naughty” You could do what you liked, kick out Brulines and do your own deals. Previously some of the Pub Cos only offered a maximum new five year lease, nothing else due to their “interpretation” of the new Pubs Code legislation. It was the only game in town and coupled with the Pubs Code Adjudicator sitting on far too many cases things took forever and the costs mounted. Now the tide has finally turned and the mode of delivery of MRO can also be by Deed of Variation. We have been campaigning for this very option right from the start. Recent cases handled by Chris Wright have firmly secured this much lower cost option.
Trying to future forecast how much better off you will be by being FOT is always subjective. However we tip our cap to the notes of a seminar given by Savills in November 2017, reviewing the then progress of the Pubs Code, and delivered by a certain trade person who happens to now be an independent assessor (IA) recognised in connection with the code To quote….
”They (the Pub Cos) recognise that free of tie agreements would have a dramatic effect on their profitability and Simon Townsend the CEO of Enterprise inns (who have now changed their name to the EI Group) estimated that the loss on each pub that went free of tie would be 18% This I believe is actually an under estimate and, were the legislation to be brought in which simply allowed the tenants to go free of tie at the next rent review with a simple Deed of Variation, I believe the loss of profit would be in excess of 25% and this would possibly push the companies into administration”….
Well we have secured the Deed of Variation option. So if the Pubcos lose profitability, where does it go. To the tenant. Maybe not in quite the same volume due to having a lower purchasing power. But we reckon the increased tenant bottom line profitability is knocking on 20%. Reasons to be cheerful when things get back to normal.
A free of tie agreement is a commercial arms length contract. No supposed great advantage from SCORFA (not that anyone noticed in reality) and upwards only rent reviews. No problem in that respect IF and ONLY IF the initial rent was set at an affordable and sensible level. The bitter pill for some has been the early, non MRO free of tie deal where the Pub Cos held the cards.. Good lease extension, free of tie but ghastly rent levels.
Should the calculations for FOT include a hike in turnover. We don’t think so. Pub Co properties do not have branded external signage confirming they own the pub. Well allright, Enterprise did initially have signage “Enterprise free House” but nobody really noticed. The customer hasn’t a clue as to whether you are tied or free of tie. It is the product range that counts. Only you know the bottom line profitability has improved but do not count on an increase in trade volumes. COVID -19 has thrown a big spanner in the works and with the exception of Admiral Taverns, the other regulated Pub Co rents are being deferred not cancelled. So no discrimination between tied or free of tie in that respect. BUT when things do get back to normal, the free of tie set up will be able to generate that much more profit more quickly. To quote the lyric from Queen…
I want to break free,
I want to break free,
I want to break free from your lies, You’r so self satisfied I don’t need you,
I’ve got to break free,
God knowns, God knows, I want to break free.
Not exactly crafted for free of tie, but emotively in the general direction.