Derby County have been charged by the EFL for breaking its Profit & Sustainability rules, but should Reading fans be worried about the club being slapped with a similar charge?
As it stands there’s been no indication that Reading will be in trouble, despite our own near-miss last summer.
So why are Derby in trouble?
In essence it all comes down to a loop hole relating to club’s selling their stadia and then leasing them back, in order to pass the EFL’s Profit and Sustainability rules. Those rules state that clubs can’t lose more than £39 million over a three-season period.
To avoid failing those regulations, clubs including Derby, Sheffield Wednesday and Reading have all sold their grounds to their owners, or companies related to them, and then leased them back for a yearly fee, generating big short-term profits for that season. Clubs including Middlesbrough are understandably not happy with that, as they see it as going against the whole point of the rules - which is to run your club in a sustainable fashion.
Wait, you’ve mentioned Reading and Derby in the same sentence but you just said we’re probably not in trouble?
The key thing here is that the whole sell-and-lease loophole wasn’t specifically against the rules. Derby are in trouble because of HOW they’ve done it. Derby ‘sold’ Pride Park to a company controlled by their owner Mel Morris for £80 million, yet Derby’s own accounts put the stadium’s worth at only around half of that.
If the stadium had been sold for the original valuation of £41 million then Derby would still be in breach of the £39 million loss limits and subject to a points deduction as per the rules. Those rules saw Birmingham City docked a maximum nine points last season.
There’s now talk that Derby could be docked up to an extra 12 points on top of the usual maximum of nine, as this would class as an ‘aggravated breach’.
In Reading’s case, they sold the Madejski Stadium to a group run by our Chinese owners for £26.5 million, something the EFL accepts is roughly around its fair market value. So while we may have gone against the SPIRIT of the rules, it seems like the EFL has had to grudgingly accept that we’ve not broken the regulations.
But weren’t Reading under a soft transfer embargo this summer?
Yes, although the full reasons haven’t been made quite clear, so we have to do a little bit of guesswork as to what happened. With that in mind, please don’t take the following paragraph as stone-cold fact.
Even with the sale of the Madejski, we were probably floating very close to the £39 million loss limit, or perhaps even exceeded it slightly. It’s likely that we alerted the EFL to this and worked out a deal to reduce our losses and follow a plan set out by them, probably along the lines of ‘sell if you get any reasonable bids and don’t sign anyone until the new season kicks in.’
This would explain why we suddenly went bonkers and spent loads in the last few days of the window because technically the fresh spending counted against the 2019/20 season accounts.
But Birmingham were under a soft embargo and now they’re in trouble again?
The EFL also set out a financial plan for Birmingham to follow for the 2018/19 season but they seem to have broken that. This is why the club is now in trouble again, even though they were already deducted points for a previous breach. The club and the EFL will now duke it out over whether Birmingham actually followed the plan and if they merit another deduction.
So who will decide Derby’s fate?
Initially it’s a three-person independent panel, however, this one is likely to get dragged through the courts as well. It took YEARS for the EFL and QPR to settle a dispute over the rules and given that this one is far from cut and dry, you could see this one going on and on and on.
Just checking one more time, Reading are OK right?
Overall, we THINK so.
As I said, it’s a bit of a grey area and there have been threats of legal action from the likes of Middlesbrough over the sell and lease scheme but this seems like one where the EFL will now have to clarify or set a rule for the future rather than retrospectively punish clubs.
Where Reading do need to be careful is how we can run the club without failing further down the line. The £26.6 million sale of the Mad Stad will drop off the books by the end of the 2021/22 season, meaning that we really need to get losses back under control. The club lost £21 million in the 2017/18 season alone, so on average we need to cut costs almost in half going forward.
So short-term it’s probably not worth getting overly worked up over, yet there is a growing question mark going forward about how we can balance the books.