Reflecting The Market - Part II


The editorial team were very pleasantly surprised with the huge positive response to our recent Newsletter “Reflecting the Market”. Due to the length of the first article we deliberately omitted the effect of Business Plans on what would then be used as comparable evidence and then as a reflection of the market. As ever all is not what it may seem. That is if the primary route to rent assessment is a slavish reliance on comperables outside the route of a carefully prepared profits tent rent valuation. Many of those comperables are as a direct result of Business Plans being prepared to take on a new letting by a POB.

So let’s look at a specific case a few years ago of a big pub in South London owned by a POB. Our Client had set his heart on the property which had a steep rent but was only ten months away from a five year rent review. He did a carefully constructed business plan, studied all the competition, prepared his profit and loss account which to succeed showed a rent reduction at review. The BDM returned the Business Plan and confirmed in an email that the Business Plan would only go forwards to support the application for assignment if the current rent was affirmed. He was told to fiddle the figures to make the justification which he duly did. He got the pub.

Our man reckoned he could just about get by with no personal drawings until the imminent rent review. Guess what…at the rent review the POB were adamant that there was no case for a reduction. The Business Plan supported the rent! It went to arbitration with the POB being fixed in their views as to the validity of the Business Plan. The rent was in the main upheld and a year later the tenant threw in the towel. That rent then stood as a direct comparable in yet another review we undertook in generally the same neck of the woods. The expert for the POB in the second case was heavily dependent on comperables in the justification of the rent of which our previous case was held up as being prime evidence.. Yes it was a rental transaction by did it represent the true open market rental, value as a “reflection of the market”. Not at all.

A Business Plan is always an aspirational document prepared by a prospective tenant to, if you will, support the dreams of future success. Those dreams are always positive with a very big capital ‘P’. We have lost count of the number of future forecasts of trade that have no direct bearing on reality. Often in support of the POB letting details which gaily pronounce that “we estimate the trade to be achievable at £xxx”. Nearly always this aspiration is optimistic in the extreme. But the rent linked to that take on future trade must be justified if the new tenant is to be successful in his hopes to take on the property. The rent set then becomes yet another comparable. The flaw in the system is that of never finding out how long the new tenant lasted in the lease. Nobody ever covers this vital point which for sure will never be revealed by the POB if they get the lease back for reletting. The only way to check is to trawl back through the records of previous licensees held on the register by the Local Authority. Some are very helpful and respond within a couple of days. Others can be next to useless “we will try to get back to you within 30 days” if you are lucky.

Where does all of this leave us? Yes comparable evidence is of passing interest if you get the full background. Shame is that you rarely do and such evidence, usually the rent figure alone, is relied upon as a certainty of “reflecting the market”. We know too much about how rent deals are cobbled together and place direct comparable evidence way down the list of influencing rent valuation.

More so than ever in the teeth of the Covid-19 pandemic.

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