21st July 2009
Fair Pint Campaign and the Federation of Small Businesses (FSB) are calling on the Government and the Royal Bank of Scotland to free the bank’s 1,000 pub estate from tie which means that they are locked into buying beer from their landlords at significantly higher prices that the same beer is available to free of tie publicans and to allow their tenants to buy their pubs by providing mortgages.
RBS owns around 1,000 tied pubs through its West Register companies. The tenancies of these pubs are managed for the bank by Scottish & Newcastle Pub Enterprises. Many of the bank's tenants are being forced out of business by a combination of high rents and the fact that the pubs are compelled to buy beer at high prices.
It has been estimated that the rate of tenant failure, or 'churn', could be as high as 40% of the bank’s estate every three years and the Fair Pint Campaign has also being told of evidence of aggressive and abusive business practices leveled against RBS tenants by Scottish and Newcastle Pub Enterprises.
Fair Pint and the FSB believe that the bank, which has openly stated that it wants to sell the pubs, should sell them to the tenants at realistic prices.
Fair Pint and the FSB have published a proposal document which shows that the extra income that pubs would receive if they were allowed to buy beer at free of tie prices would give landlords the ability to take on a mortgage provided by the bank at commercial rates.
Despite clear evidence about the problems being caused by the way in which the pub estate is managed, the Government seems reluctant to use its majority shareholding in the bank to force a change.
In response to an oral question from the Liberal Democrat MP, Greg Mulholland, about the RBS pub co estate on the 14th July, the Treasury Minister Sarah McCarthy-Fry said that the Government had no say over the management of RBS despite the fact that it is the major share holder in the bank.
Fair Pint and the FSB are calling on RBS, the Chancellor and UK Financial Investments, which is the vehicle through which the Government’s owns shares in the bank calling for them to free the RBS pub estate from the tie and to provide mortgages for tenants.
Steve Corbett, a Fair Pint member and tied tenant said:
"The Government has promised to back small businesses through the current downturn. It is therefore entirely inappropriate for a bank owned by taxpayers, to be causing such a high level of small business failures. Our scheme would allow the Government to take action to support the struggling pub sector at the same time as helping RBS back onto a proper commercial footing.
"The right people to own pubs are publicans and here is a chance to make a real difference and to save jobs. The bank will be able to get rid of an asset at a realistic price, it will open a new market and source of income through the provision of mortgages to their former tenants, the Government will demonstrate its commitment to small businesses and the future of the pub sector and Scottish & Newcastle will still be able to offer their products to the pubs at competitive wholesale prices.
“It’s a real win-win retuning pubs to publicans and returning RBS to proper banking. We hope that the bank and government as the major shareholder will take this opportunity.”
Clive Davenport, Federation of Small Businesses Trade and Industry Chairman, said:
“With over 40 pubs closing a week, we are witnessing the death of theBritish pub. Pub owners are burdened by high rents and the fact that they are forced to buy beer at higher prices than they would elsewhere on the free market.
“Throught this scheme, the Government has an opportunity via RBS to help around 1,000 pub owners get out of the tie and give them the chance to run their businesses effectively, and to make a fair profit. The FSB urges RBS and the Government, as a majority shareholder, to act now and take on this practical solution that could save some of our pubs from closing.”
Notes for Editors
The full details of the Fair Pint and the FSB proposed tie to mortgage scheme are below:
The RBS ‘pubco’
RBS owns around 1,000 pub freeholds which were acquired from SNPE. SNPE acts as property manager for RBS in connection with its pub estate. This means that SNPE receives rents, administers orders for beer and other supplies, carries out rent reviews and fulfils other normal property management functions. SNPE employs around 150 staff and receives substantial income from RBS for its property management activities. It is not known whether RBS directly employs any staff in connection with the pubco estate. The small businesses that are the tenants of RBS directly employ in excess of 10,000 people.
RBS pubco tenants pay to SNPE sums due for rent and for beer and other supplies purchased. The table below shows the price differentials for a sample of popular products available from SNPE to tied tenants in the RBS pubco and the same available to free of tie publicans from SNPE’s parent company, Scottish & Newcastle (Heineken).
The very substantial differences in price shown above, coupled with the rents charged by RBS to its tenants lead to the following:
- Inability of tenants to compete on price with local freehouses
- Lack of available profit and capital for tenants to invest into their businesses
- Pub closures and loss of jobs
RBS has indicated that it wishes to dispose of the pub estate. A disposal to another pubco will result in a continuation of the same problems.
The ‘Tie for Mortgage’ Scheme
1. We believe that RBS should offer each of its tenants the right to buy the freehold interest of its pub this right to buy should last for 2 years. The bank should appoint an independent panel of valuers to agree the price at which each pub will be offered for sale and tenants should be offered a discount from a scale fixed in relation to the length of time that they have been in occupation.
2. RBS will provide a commercial repayment mortgage for the tenant to buy the pub.
3. We believe that the Government should use the provisions of its Small Firms Loan Guarantee scheme to underwrite the exposure of the bank to the scheme.
4. The tenant will be freed from obligations to purchase beer and other supplies from SNPE upon completion of the formalities in relation to the purchase of the freehold interest. SNPE will be free to offer its products to the former tenants of RBS at open market and competitive prices.
5. The sums formerly due to RBS/SNPE in respect of rent and wholesale profits will be available to the former tenant for the servicing of loan interest and capital repayment to the bank in the normal way.
A pub in South London is part of the RBS pubco estate and has the following headline trading figures.
- Net Sales £726,000
- Rent £ 65,000
- Barrels of beer purchased 375/annum
- Wholesale beer purchases from RBS £150,000
- Discount lost through tie (paid to RBS) £56,000 (£150/barrel)
- Available for debt service under ‘Tie for Mortgage’ scheme £ 121,000
The open market freehold value of the pub would be, for instance, £750,000. Assuming use of additional loan for mortgage deposit then the total required for debt servicing, on a repayment basis, in the first year of the mortgage would be made up as follows:
Repayment of £75,000 deposit £15,000
Interest on deposit @ 5per cent £ 3,750
Repayment of £800,000 principal £33,750
Interest on principal at 4 per cent £27,000
Total £ 79,500
Available to tenant for debt service under ‘Tie for Mortgage’ scheme £ 121,000
The proposal will support small business, preserve jobs, achieve RBS objectives and be in step with trade and government concerns over the detrimental effects of the beer tie. We are asking the Government to set up a working party to look into the possibility of rolling this scheme out for the benefit of small businesses in the pub sector. If this scheme is successfully executed, it could act as an important precedent for similar arrangements.