Tenants risk business failure with mandatory free-of-tie option, says report

That’s the stark warning from a report analysing the outcome of the Government’s proposals to introduce a statutory code and an adjudicator, to regulate the relationship between pub companies and their tenants.

The Government has made three proposals: to introduce a mandatory free-of-tie option, that a tied tenant should be no worse off than a free-of-tie tenant, and that the code should apply to pubcos with more than 500 sites.

Dryburgh Research said: “We would expect higher business failures among tenants as the higher fixed rent increased the operational leverage on their businesses. The tie is a ‘safety valve’ where profit and risk are shared. If a licensee sells more beer, they pay more wet rent, whereas in hard times they pay less.”

It added: “We would expect some of the weaker, mid-scale family brewers to exit and close their breweries.

“The pubcos’ inability to plan would force them to go completely free-of-tie as we think a hybrid model is unworkable. They’d trigger rent review clauses, cut special commercial or financial advantages and sell weaker pubs to protect cash flow.”

Two-tier industry​

The analysis explained that, under the guest beer proposal, “it is fair to assume that the tenants would opt for their most profitable line”. It listed Carling, Carlsberg, Foster’s and Heineken as such examples.

The report also warned of a statutory code creating a “two-tier tenant industry”, and said the companies that do not fall under the threshold of having 500 pubs or more will need to adhere to the same code if they want to keep their tenants.

“The 500-pub limit has the aim of ensuring that family brewers are excluded from the code, but we think it could have an opposite effect,” it said. “In the face of a two-tier market, we expect smaller companies to match the terms of the pubcos bound by the code.”

The Government's statutory code consultation closed last month, and it is due to issue a response in Autumn.