During the House of Lords report stage of the Small Business Bill – which includes the pubs code - Business Minister Baroness Neville-Rolfe said the Government would use secondary legislation to allow tenants and pubcos to agree a waiver to MRO. She said the details of how long the waiver would be and what constituted ‘significant’ would be clarified in consultation.
She also said she would use existing powers within the pubs code to exempt “genuine franchise agreements” from the MRO clause. The definition of a franchise agreement will also be subject to consultation.
Amendments calling for similar measures to be enshrined within the pubs code were withdrawn after Baroness Neville-Rolfe’s announcement.
The Government also successfully introduced an amendment that not only would brewing pubcos be able to place conditions around the stocking own brands but would also be allowed to place some restrictions on the sale of competitor products in their pubs.
Responding to concerns about pubs being sold by a company covered by the code to a new owner under the 500-pub threshold, the Government successfully moved an amendment that extends the protections of the code—apart from the market rent only option—to tenants whose pub is sold by a “code company” to a one outside the code. It said the protection would last until the next rent assessment and will mean that tenants are able to refer any code breaches during that period to the adjudicator.
The Government also reversed its decision in the Commons to restrict parallel rent assessments to prospective tenants only.
Baroness Neville-Rolfe said: “We will consult on how best to streamline this with the market rent only provisions so that, as far as possible, the processes are integrated to help both pub companies and their tenants and to minimise bureaucracy.”
Labour peer Lord Mendelsohn agreed to withdraw his amendment which called for a freeze on MRO for five years in return for investment from a pub company.
Responding to this amendment Baroness Neville-Rolfe said: “The noble Lord suggests in his amendment that the investment agreement should be a trigger event for MRO and parallel rent assessments. The Government are not convinced that this is the right approach. Tenants will have the right to choose the investment offer or to remain with their current agreement. They will have the opportunity to take advice on whether to take the investment deal. To require MRO every time an investment offer is made would be likely to discourage pub companies from making or agreeing to such offers and so undermine the very investment that we are all trying to encourage.”
Lord Hodgson, the Conservative peer and former Marston’s director, agreed to withdraw his amendment which set out an exemption from MRO franchise agreements, defined as “agreements whereby no rent is paid by the franchisee and their share of the profit is unaffected by the price paid for tied products”.
Baroness Neville-Rolfe responded: “The Government recognise that there are turnover-based pub agreements on the market where the tenant’s interests are arguably more aligned with the pub company because both rely on a fixed proportion of turnover. The tenant does not face the combination of wet and dry rent, as with traditional agreements. The benefits of a franchise are that you are buying a proven business concept that has been tested by the franchiser. That should mean that your risk as a franchisee is reduced. Alongside the turnover share element, this would seem an important part of what constitutes a genuine franchise.
“However, pub franchises also retain some characteristics of a traditional tied agreement that mean the tenant is still at risk. For example, the tenant is locked into the agreement for at least five years with no means to change the terms. The pub company remains in a stronger negotiating position, as we understand that the relative turnover share figure is fixed and generally non-negotiable, and a franchisee is unable to shop around for a better deal on some or all of his products and services.
“However, after much consideration, I am pleased to confirm to my noble friend that the Government have listened to concerns expressed and agree that genuine franchises should be exempted from the MRO provisions. Given the differences between traditional tied pubs and genuine franchise agreements, we consider this a reasonable exemption, but we are clear that the remaining code protections should still apply.
“We will exempt only genuine franchise agreements, and I shall make a few comments about our thoughts here. My noble friend put forward in his amendment two sensible criteria that are fundamental to defining a genuine franchise, but there are likely to be others. Therefore, it would be wise to consult further before we specify exactly what we mean by a pub franchise, and to take this forward in secondary legislation. It is our intention to provide for the exemption using the existing Clause 71.”