The original framework would have seen the code apply only to companies with more than 500 tied pubs. However, this week’s announcement set out plans for a core and enhanced code.
The core code will apply to all tied lease and tenancy agreements operated by pub owning companies. Micro-businesses (defined by the Government as those with fewer than 10 employees) will be exempt from the code, but will be able to join voluntarily.
The enhanced code will apply to companies with 500 or more tied pubs. Admiral Taverns Ltd, Enterprise Inns plc, Greene King, Marston’s, Punch Taverns and Star Pubs and Bars would all be covered by the enhanced code.
Parallel rent assessments
The key requirement of the enhanced code is to offer parallel tied and free-of-tie rent assessments if requested.
These would be applicable if the tenant and pub company have gone through 21 days of negotiations with no agreement. However, this will not mean an automatic rent adjustment. The Government says the aim of the proposal is to “show that the tenant will be no worse off under the tied agreement than if he or she were free-of-tie”.
The rent assessments will be based on relevant market information and carried out in line with Royal Institution of Chartered Surveyors (RICS) guidance. The assessment would include an estimate of the tenant’s likely profit (known as “post-rent balance”).
If a tenant wants an assessment they would need to request one from the adjudicator and pay a fee of £200.
The Government suggests taking a “rolling approach” to implementation, with tied tenants able to request a parallel free-of-tie rent assessment at their next rent review.
The adjudicator
The Government says an independent statutory adjudicator is “vital” and insists the role should have “much greater powers than the existing industry mechanisms, including the ability to investigate systematic breaches of the code, as well as to have the power to impose a range of sanctions following an investigation, including to impose financial penalties and to publicise breaches”.
The adjudicator will be given discretion on how best to manage cases. This could include ruling on paper evidence and/or whether to allow the parties to submit expert evidence and whether to hold panel hearing.
The Government’s report says the adjudicator will have “finite resources and will have to prioritise the workload to fit the budget”. They will be expected to consult on guidance for carrying out investigations, how these will be prioritised and how enforcement powers will be used.
The adjudicator will issue advice and guidance on interpreting the code.
The level of proposed maximum financial penalty will be subject to consultation.
Tenants will be expected to a fee of around £200 when bringing a complaint, which would be returned if the complaint is upheld.
If a pub company is found to have breached the code they will be required to pay “some or all of the costs of an investigation”. If an individual has made a complaint that is found to be “vexatious and wholly without merit” then that complainant will have to pay on the same basis.
Open market rent review
The core code will include a provision that tenants will have the right to request an open market rent review if they have not had one in five years.
The Government said it is mindful of the concerns from both pubcos and tenants that the provisions to enable a tenant to request a rent review within this period – if the pub owning company significantly increases drink prices or if an event occurs outside the tenant’s control – would need to be carefully designed. These provisions will be defined following consultation.
The report says:”In doing so we will seek to draw on existing practice in the industry – such as the Everards’ approach called “Material Changes and Exceptional Circumstances”, which is applied when changes outside the tenant’s control have a negative impact on the pub’s business.”
Costs
The adjudicator will be paid for by a levy on the pub owning companies in the scope of the core code.
The average cost of the adjudicator has been put at £540,000 and then £1.75m per year to run.
The levy will be set in proportion to the number of tied pubs each company owns as is currently the case with self-regulation. Companies that operate only managed and/or free-of-tie pubs will not have to contribute. At the beginning the companies with most tied pubs will pay more with the funding model eventually shifting so that those who breach the code most often will contribute the most.
The Government put its best estimate of the total cost of the statutory code at £41.2m, with an average annual cost of £4.9m.
The cost of carrying out free of tie rent assessments is estimated at £1.6m per year to pub companies and £300,000 to tenants.
Transfer from pubcos to tenants
The level to which pubcos will be expected to compensate tenants for unfair treatment is difficult to estimate as its scale is unknown. However, the Government has put its highest estimate at £140m. This is based on an assumption that all 20,000 tenants tied to companies with over 500 pubs are unfairly treated and will be owed £7,000.
Effect on pub closures
The impact on pub closures is contested, ranging anywhere from 0 to 536. The Government says its best-case scenario is 52 closures as a result of its proposals.
Mandatory free-of-tie option
On its decision not to introduce the automatic right to choose a free-of-tie agreement the Government said:
“The Government acknowledges that such a mandatory free-of-tie option – also known as the market rent only option – is popular with many tenant groups and might arguably offer the simplest way of ensuring a tied tenant is no worse off than a free-of-tie tenant. It would have required companies with more than a certain number of pubs to give their tenants adequate information to decide whether they would be better off under a tied or free-of-tie agreement and then allowed the tenants to go free-of-tie if they wished.
“However, it 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.”
Guest beer option
Calls for a guest beer option were also dismissed, with the Government saying:
“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 Government has not yet seen any workable restriction of any permitted type of guest beer which would be sufficiently certain to provide a sustainable and lawful basis for a more limited guest beer option. There is a historical precedent that supports this position, for example through limiting the guest beer to a beer of a particular type. This measure was introduced in the beer orders in 1989 and led to the European Commission instituting proceedings against the UK on the basis that it represented a quantitative restriction on imports of bottled beers.”
Franchise pubs
Most franchise arrangements will be covered by the code. Marston’s had called for its franchise model to be exempt, as it does not charge a dry rent. Instead franchisees pay a fixed annual franchise fee, a 1.5% share of turnover and profit with the franchisor.
The report says: “The Government recognises the difference in the Marston’s approach as opposed to the other franchise agreements of which it is aware. However, given that its franchise agreements involve purchasing obligations for beer at above market prices, there is still a significant risk that this combined with the franchise fee could result in an unfair share of risk and reward for tenants. Therefore it should be covered by the proposed Statutory Code. When consulting on the final version of the Statutory Code Government will consult on the specific wording of the rent sections of the Code to ensure they deliver the intended objectives for fee-based tied agreements as well as tied agreements that charge a rent.”
The Government also discounted simply allowing franchisees to be protected via the British Franchise Association (BFA) Code of Conduct.
It said: “While containing many positive aspects, the BFA Code is voluntary and does not go far enough in ensuring the core principles behind the Government’s measures for the pubs sector would be achieved, especially the no worse principle. Nor does it offer the enforcement mechanisms required to address the problems in the relationship between pub companies and their tenants.”
The future of self-regulation
The Government’s plans cast doubt on the future of The Pubs Independent Rent Review Scheme (PIRRS) and Pubs Independent Conciliation and Arbitration Service (PICAS).
The Government said it could see “the merit in tenants having a choice of arbitration mechanism but whether PIRRS and PICAS do continue is essentially a question for the industry.”
The report says: “The code will provide that tenants should exhaust any in-house dispute resolution procedure before taking a dispute to the adjudicator, although safeguards will be put in place to ensure that such mechanisms are not used to prolong unnecessarily the period before a tenant can refer a complaint to the adjudicator.”
Gaming machine tie
Rather than abolishing the machine tie, the Government will include a provision in the code stipulating companies “may no longer oblige their tide tenants to source machines through them”. Instead, tenants would allowed to have the choice to be tied or not for machines.
The Government said there was “insufficient evidence to justify obliging pub-owning companies to remove the tie for all non-drink products beyond gaming machines”.
Property maintenance
The code will stipulate that pubcos must be clear when entering into agreement with a tenant as to the extent they will be obliged to maintain and repair the property.
A Schedule of Condition and protocol governing the treatment and procedures to be followed in dealing with dilapidations should be provided to all tied tenants under the code.
Flow-monitoring equipment
The code will mimic the existing industry framework by saying FME data can be used to support the beer tie but it must be supported by other evidence.
Timescale
The Government says it intends to establish the code through primary legislation and will be seeking to legislate "at the earliest opportunity". It will need to consult on its final draft code beforehand.