Cracking the pubs code - Is it working?

As the festive dust settles, and licensees prepare for the challenging month ahead, thoughts will be turning to the future.

Of course, for a fair number of operators, three little letters may be playing a rather prominent role in their plans as tenants asses the best route forward for their business.

But, since the launch of the pubs code and the market-rent-only (MRO) option, what have we learnt about the way ahead for tenants seeking to break free from the tie?

The introduction was not without controversy. The signs were all there for a difficult birth; heated arguments, a stop-start launch, last minute rewrites - all amid warnings and prophecies of ill-drafted and ill-conceived legislation.

As trade consultant Phil Dixon puts it: "As the highly respected licensee and former Federation of Licensed Victuallers Association (FLVA) president David Hawksworth prophetically observed: "Every time MPs intervene in our industry to make life better for tenants/lessees, they inevitably make it worse'."

But now, five months in, are we ant clearer as to where we stand on MRO? Has it ushered in a brave new world of opportunities for tenants?

The overall position shows a hesitant uptake of the opportunity. Enterprise leads the field with 94 enquiries for MRO, Punch reports 40, Greene King 24, Admiral five and Marston's say it has had "less than double figures".

However, as Mike Clist, chief executive of the British Institute of Innkeeping (BII), points out, in the first 12 months, only a fifth of tenants would be eligible for MRO.

The interest is certainly there though, Clist reports more than 400 phone calls on the topic and Paul Newby, the pubs code adjudicator (PCA), echoes that.

"In relation to the enquiry line, we had 376 calls, and the top issue raised by callers was around rent assessment and MRO," Newby reports.

However, many of those tenants who have started down the path are reporting high initial offers, plus considerable up-front costs and charges, while others have found themselves handed crippling dilapidations bills on top. Others have been left unclear on timings, and with only a 21-day window of opportunity to apply for MRO following a trigger, some have missed out.

British Beer & Pub Association (BBPA) chief executive Brigid Simmonds says the industry remains in a "learning phase" over how the legislation would operate: "This inevitably creates a degree of uncertainty; the legislation is very complex and there are still different interpretations of some aspects."

Punch CEO Duncan Garrood echoes these concerns: "The way the code was implemented was problematic which caused, and is still causing, confusion and a degree of frustration on all sides.

"We have sought to overcome this for our publicans through high-quality communication, such as the pubs code seminars run by the BII, Association of Licensed Multiple Retailers (ALMR) and FLVA, at our roadshows in September and October, and the recommendation of professional, accredited and genuinely impartial advice."

Clist adds: "I worry there is still a lack of understanding and knowledge among tenants and lessees. This may be because many tenants are happy under the ties system. Alternatively, it could be that, as an industry, we still need to do more on educating tenants of the opportunities available to them."

Code compliance

The pubcos say they are backing the legislation. Garrood adds: "The intervention of the pubs code adds another dimension to how we will run our pubs in the future, but what we at Punch recognise is a salutatory right for our publicans and so we are fully committed to embracing the code and complying with it."

And he's not alone. Clive Chesser, managing director of Greene King Pub Partners, says the company is doing everything possible to be compliant with the code and had trained more than 100 team members to fully understand the legislation to "provide the best possible service and support to our partners".

While all of the pubcos are keen to stress they are embracing the legislation, it's clear that the preferred option for all is to retain tenants under the tie. A spokesman for Enterprise says the company is working hard to ensure it is making its offer more attractive: "We are focusing on short-term agreements, designed to give greater flexibility to tenants and also ourselves.

"Our business relies on successful partnerships with publicans and we are committed to exploring innovative and interesting ways we can work with them."

Admiral is also keen to reinforce the benefit of the tie to its tenants, so far with some success claims Andy Clifford, property and strategy director.

"To date, we have only received five requests for MRO terms and licensees of the first two requests have both agreed terms for new tied agreements," he maintains. "Admiral remains an advocate of the supported tied model and the pubs code has not changed our approach or the way that we work with our licensees."

But despite the words of support and encouragement, critics of the pubcos are claiming the offers being made are unrealistic and designed to deter tenants from pursuing an MRO complaint.

Trish Mason, a Punch licensee at the Millwright Arms, Warwick, says she applied for MRO after the pubco suggested a 40% increase to her rent during her five-year rent review. She said her MRO offer consisted of a £79,000 a year rent, up from a tied rent of £38,000, and she was also told she would need to pay a further £79,000 up front, which included a three-month deposit and a further three months security along with bills and fees.

And as Dixon says, her case is far from unique and she believes most pubcos appear to be basing their opening MRO offers on what the tie would be worth to them and then adding in additional fees.

Issues for arbitration

As a result, so far, Newby reports a total of 77 referrals for arbitration to the PCA's office, with the top issue for arbitration being based around MRO.

And it is through those arbitration and the ongoing process that many in the trade hope the situation will become clearer. Clist says: "The code works on a very tight time line and parts of it are not easy to understand."

"There are some areas regarding the approach being adopted by some pubcos that will need ruling on by the PCA. We at the BII fully understand why a pub company may be offering one way forward regarding the MRO offer and likewise why the tenant may regard that approach as unfair."

Newby is keen to provide that clarity, but he may be hindered by the fact the arbitration process must remain private. He said: "It's not like a court judgement, the results won't be hung out in public unless the parties agree to lift the veil, but that's pretty unusual.

"We're looking at ways we can use the experience of the arbitration process to help inform how we go forward with advice without breaching the confidentiality agreements.

"We may be able to illustrate key points and we've talked about the possible use of case studies."

Act with haste

While we wait to see how the situation evolves, one key message Newby is keen to get through to tenants is the necessity to act quickly. Reports of tenants not responding to notices of rent reviews, in some cases 18 months ahead of time, has caused consternation, and it is something trade bodies and Newby are watching closely. Upon receiving a rent review notice, regardless of the date of review, tenants have 21 days to request MRO information from the date of the notice, or miss out.

Newby emphasises: "When tenants get that notice or letter they need to act on things immediately. That's a big point. Whenever you get a notice, a rent assessment proposal, you need to look at it immediately and act upon it. Don't put it to tone side to deal with later."

With regard to claims from campaigners that the pubcos are attempting to subvert the legislation, Newby stands firm. "This is new law but the code is the code. My position is to expect pubcos to stick to the letter and the spirit of the law.

"I've met all the top people and they've all told me they're wholly committed to seeing the code implemented and I expect to see that happening on the ground."

He also says it's vital that tenants seek independent and expert advice when looking at the process, an approach Trish Mason backs. "We really need to be helped more," she says. "It's daunting - I don't think many publicans have gone for it because you think 'oh my god, if I don't get it right, it will be thrown out'."

Ultimately, time will tell if the MRO offer will prove effective, as Clist says: "I hope the controversy subsides. If the system is working, the licensees of the country should end up with a better deal today than they had a year ago."

And Simmonds adds that MRO provides an opportunity for a re-evaluation of the tied model:" MRO is not a 'catch all' solution for pubs; it will inevitably lead to higher rents for those that pursue it. Instead, as the new system beds in, the next year is an opportunity to show that the tied model serves the sector well and that the vast majority of business partnerships benefit from it."

Ultimately, as the process runs on, the creases should slowly be ironed out so those applying down the line may find the system is working well for the trade. However, for now, most will be hoping that doesn't prove to be cold comfort for those early few that have found themselves the unwitting guinea pigs in the early days of MRO project.