A guest beer option has also been ruled out under the plans, which would see pub owning companies with more than 500 tied pubs being made to contribute to an adjudicator, which could levy fines for breaches by pubcos.
It will bring in a 'Core Code' to protect all tied tenants – providing them with ”increased transparency, fair treatment, the right to request an open market rent review if they have not had one for five years, and the right to take disputes to an independent adjudicator”.
The Government has given a "best estimate" total cost of £41m for its proposals, with a worst case cost of £231m. This includes £540,000 on setting up the adjudicator with "ongoing costs" estimated at £1.8m a year, which will be paid for by a levy on business. The cost of rent reviews is estimated as £1.6m per year to pub companies and £300,000 to tenants. The total cost to pubs has been calculated as £2.5m.
The Government claims its proposals will reduce the number of pub closures, suggesting only 52 will close as a result of the code being implemented. This is described as its "best estimate", with the highest being 536.
In its long awaited response to its consultation on plans to legislate in the pubco model, the Department for Business, Innovation & Skills said: “We will introduce a statutory code with a right to an open market rent review if they have not had one for five years, and the right to take disputes to an independent adjudicator.
“We shall consult further on the precise definition of provisions to enable tenants to request a rent review within the five-year period if the pub owning company significantly increases drink prices or if an event occurs outside the tenant’s control.”
Rent assessment
It said the “enhanced code” will also “require pub owning companies with 500 or more tied pubs to offer parallel tied and free-of-tie rent assessments to potential or existing tenants if they request them when they are considering taking on a pub tenancy or at the time of their regular tied rent review”.
“A tenant would have the right to request this parallel free-of-tie rent assessment once the parties had been unable to reach agreement on a tied rent offer following a period of negotiation.
“If the tenant requests a parallel rent assessment, he or she would pay a £200 fee to the adjudicator – the purpose of which is to ensure that tenants consider carefully if the parallel free-of-tie rent assessment is necessary for the negotiation to be concluded successfully. The new adjudicator will give tenants confidence that if the parallel rent assessment provision is not properly implemented, then they can seek redress from a truly independent third party.”
The report from BIS says the free-of-tie parallel rent assessment should be carried out on an individual pub basis and in line with Royal Institution of Chartered Surveyors (RICS) guidance.
Negative impact
The report, published this morning, says a mandatory free-of-tie option, or market-rent only option, “would have been likely to cause a high degree of uncertainty in the industry, with a likely negative impact on investment and the possibility that several pub owning companies would abandon the tied market”.
“It would also have unnecessarily risked leading to higher levels of closures and job losses.
“For similar reasons the Government has decided not to include a guest beer option in the code. After considering the evidence received, the Government considers that this proposal also carries too great a potential to undermine the tied model as a whole because of the likelihood that tenants would use the provision to purchase their best selling beer (usually a draught lager) outside of the tie.”
The report says that data from flow monitoring equipment may be used to enforce the beer tie “only if it is supported by other evidence”.
Adjudicator
It adds: “A new independent adjudicator will enforce both the core and enhanced provisions of the code with powers to arbitrate disputes, investigate systemic breaches and provide guidance on interpretation of the code.
“The Government also intends that the adjudicator will have the power to impose sanctions – including financial penalties – if it finds that the code has been breached.”
The code will be subject to review, initially after two years and then every three years thereafter. The adjudicator will be funded by an industry levy which will be set in proportion to the number of tied pubs that each company owns. “Over time, those companies that breach the code will contribute more, which should provide an additional incentive for compliance with the code.”
The report says the Government plans to legislate at the “earliest opportunity”.
Fair deal
“The Government believes that this set of measures provides a proportionate and targeted response, which ensures that all tied tenants are protected.
“The new statutory code and adjudicator, combined with the right to a parallel free-of-tie rent assessment, should provide tenants with the information and power they need to negotiate a fair tied deal.
“Pub owning companies that are already behaving responsibly have nothing to fear; this is not abolition of the beer tie. The Government supports the tie as a valid business model where it is used properly and is not abused. It will enable companies to demonstrate what should already be the case, namely that their tied agreements offer a fair share of risk and reward and that their tied tenants are no worse off than free-of-tie equivalents.
“In line with the Government’s policy on business regulation, microbusinesses will be exempt from the legislation.
“This Government has consistently demonstrated its support for a healthy pub industry, including bringing an end to the beer duty escalator in Budget 2013 and cutting beer duty for the second year running in 2014. A healthy pub industry also requires fairness for all the businesses involved.
"With the key protections of the statutory code and adjudicator in place, the Government is keen to see the British pub and brewing industry build on its proud heritage – and for a sustainable and fairer industry to enable pubs to remain at the heart of our communities.”
Commenting on the announcement Deputy Prime Minister Nick Clegg said:"British pubs are often the centre of our community, a place where we meet friends, watch sport and enjoy a Sunday roast – they are a national treasure and the envy of the world.
"They also contribute billions to our economy every year. But for too long, landlords who are tied to larger pub companies have struggled to make ends meet – over half earning less than the minimum wage.
"The self regulatory approach hasn’t worked, so these new rules will give fairer treatment for landlords so that they can keep your local pub going strong."
Read Vince Cable's foreword to the consultation response
Tenanted Pub Company Summit 2014
Stop Press! Tenants now attend the Tenanted Pub Company Summit at half price (£198 + VAT per place).
What will the statutory code mean for you? Get informed. Be part of the debate. Next Thursday, June 12 at The Landmark, London. Limited places available.
