Rent levels bear no relation to MRO

The phone has been ringing off the hook from established clients worried that the triggering of the market rent-only option (MRO) will only occur if a rent increase is proposed. This allows the pubcos to keep rent assessments on a “no-increase basis” and will have the effect of neutralising the MRO proposal.

With some very rare exceptions, the rent reviews with which we have been involved during the past few years have all seen rent reductions, some as much as 45%, either by negotiation or reference to the Pubs Independent Rent Review Scheme (PIRRS) or arbitration. The pubco fall-back position, if it realises a rent reduction is likely, is to offer to keep the rent at the same level upon review. This, of course, is no more than a future rent increase year upon year if the rent is linked to increases in the Retail Price Index.

MRO has nothing to do with the current level of rental. It is muddied thinking by the Government to assume that a ‘nil’ increase confirms the current rent is either at the correct level or the tied tenant is automatically no worse off than the free-of-tie tenant.

The past five years has seen an unprecedented fall in draught beer consumption (Source: British Beer & Pub Association) and a significant increase in pub running costs, which have had the effect of compromising profitability and, in turn, reducing rental levels across the UK.

The principle of MRO is fatally undermined if the ‘no increase’ proposal is adopted, which cannot have been the underlying intention of the ‘no worse off’ principle. The temptation to succumb to the siren calls from certain pubcos to hasten free-of-tie negotiations is very tempting if it is accep-ted that there are negative ‘unforeseen consequences’.

I can see no great advantage in settling anything until the full results of the Government consultation has been completed and studied and then ratified in the pubs code. Under MRO, the tenant will not have an unfair rent forced upon him by unilateral action of certain pubcos. That position will be guarded against by the pubs code adjudicator to ensure both fair play. The sacrifice of pubco wholesale contribution/wet rent has no bearing on MRO, despite their pleas that their corporate financial position must be protected.

David Morgan is a director at Morgan & Clarke​​