Low MRO numbers caused by 'complex and convoluted procedures'

It was November 2014. David Cameron was the prime minister of a coalition government and Jeremy Corbyn was a Labour backbencher.

It seems like a long time ago, but this was when MPs voted in favour of including the market-rent-only (MRO) option as part of the pubs code, the new legislation governing the six largest tenanted pubcos.

The option gives tied licensees the right, at certain trigger points in a tenancy, to request a quote on a free-of-tie lease. Tenants that then take that free-of-tie option would pay the market rent for the pub and not be tied on products.

The inclusion of the MRO option in the pubs code was hailed as a landmark moment for tied tenants. “We are hopeful that, finally, we will see a much fairer and just balance in the relationships between pubco and tenant,” Justice for Licensees campaign leader, Inez Ward, said at the time.

Following 20 months of political wrangling over the specifics of the new legislation, the pubs code, and with it the MRO option, came into force on 21 July 2016.

Ward called the day a “new dawn” that would change the relationship between the six pubcos (Ei Publican Partnerships – known as Enterprise Inns at the time – Marston’s, Punch, Star Pubs & Bars, Admiral Taverns and Greene King) and their tied estates.

Almost a year on from the pubs code becoming law and the most notable thing about the MRO option has been the low numbers coming through.

Figures seen by The Morning Advertiser (MA) from Ei, Marston’s, Punch, Star Pubs & Bars and Admiral show that while the five companies own more than 9,000 pubs between them, only eight licensees have successfully completed the process to go free of tie since the code came into force.

The figures show that not a single licensee at Star Pubs & Bars or Marston’s has completed an MRO. Only one Admiral tenant has agreed an MRO, while three Punch licensees have taken the option as have four Ei licensees.

Why such low figures?

Why has such a critical aspect of pub legislation seen such low figures?

It is not like there has been a lack of demand for MRO. Four of the six pubcos provided up-to-date information on the number of licensees that had requested an MRO quote.

Ei tenants made the most requests at 171, while 90 Punch tenants, six Admiral tenants and six Marston’s tenants made such a request. Green King did not provide up-to-date figures but data the pubco published in October 2016 showed that even then 24 licensees had requested a quote.

There are licensees that have chosen to remain with a tied lease, but a significant number of MRO request cases have been referred to the pubs code adjudicator (PCA) Paul Newby. In April 2017, when the PCA announced its latest case awards, Newby said there were still 97 outstanding cases at different stages within the arbitration process.

Newby, a former director of pub property agency Fleurets, was appointed PCA in March 2016 with the remit of ensuring tenants and pubcos honour the pubs code legislation.

Ei has announced that of the 171 MRO offers that had been issued to licensees, four licensees have accepted them, 59 licensees have remained tied, but 61 licensees had challenged their MRO offer and those cases were currently with the PCA.

Newby said in April that he felt “good progress [was being made] in moving cases through the arbitration process”, but critics say he has not done enough to accelerate the MRO process for tenants.

The impact of individual deals

Commenting on the figures, Association of Licensed Multiple Retailers (ALMR) chief executive Kate Nicholls said they give an indication of the effect the legislation has had in encouraging pubcos and lessees to negotiate more individual deals.

But she added: “They paint a very partial picture of what is happening on the ground and, in particular, understate the appetite for free-of-tie arrangements among lessees.”

She said there had been “no slackening of interest in MRO” in the number of calls and emails the ALMR has received. “The small number of agreements concluded has more to do with the complex and convoluted procedures lessees are having to go through to exercise their rights than an indication of meagre interest as has been implied,” she said.

One licensee, who has been attempting to go MRO for almost six months, told MA that the process was “very complicated” and was not being helped by the PCA.

On condition of anonymity, the tenant said: “The PCA [office] said it wasn’t happy with my claim because I didn’t make a ‘legal argument’ and suggested I employ a solicitor to write my statement of claim. “This is supposed to be a low-cost process and I don’t think that the average licensee has got that cash to spare,” the licensee said.

The ALMR’s Nicholls also said the PCA had confirmed that more than 50 cases, where an MRO interest had been registered, have “fallen by the wayside – some because a better tied deal has been reached and others because it is too costly for the lessee to pursue all the way through the PCA or because onerous conditions to going free of tie have been proposed”.

British Beer & Pub Association (BBPA) chief executive Brigid Simmonds agreed that the pubs code was proving complicated and was not surprised by the low number of successful MROs.

“The legislation is very complex and there are still some aspects of the law that need clarification, which is why we have called for more guidance from the adjudicator, something to which I believe he will respond in a positive way,” Simmonds said.

Once Newby adjudicates on the backlog of MRO cases, the hope is that licensees will start to flow through the process more freely.

However, the more time that passes without a consensus on how to resolve MRO disputes, the more ammunition there will be for the critics of Paul Newby.

Liberal Democrat MP Greg Mulholland, a vocal opponent of Newby’s appointment as adjudicator, has claimed that Newby is damaging the MRO process. “All he has done is act as a private arbitrator. He needs to explain what the code means in cases and that will then apply to all cases going forward,” Mulholland said.

However, Admiral Taverns property and strategy director Andy Clifford suggests another possible explanation for the low number of completed agreements. He said that the pubco was seeing “limited desire” for tenants to break the tie and seek out an MRO agreement. A claim backed up by the fact that only six Admiral licensees had requested MRO quotes.

“We regard this as a clear endorsement of our approach and the strength of our relationships with our hard-working and committed licensees.

“The tenanted pub model provides lower risk, lower cost opportunities,” Clifford said.

Higher than numbers suggest

But there is little doubt that the interest in the MRO option is higher than the numbers suggest.

In January this year, Newby revealed that an enquiry line set up by the PCA to provide information on the code had received 435 enquiries, with the MRO process being one of the top issues raised by callers.

So what more can be done to smooth the process for tenants that do want to break the tie?

Critics might say that more could be done by the pubcos themselves. In a parliamentary debate on the effectiveness of the pubs code in January 2017, the then Under-Secretary of State for the Department for Business, Energy & Industrial Strategy, Margot James, said that pubcos “were flouting the code”.

The anonymous licensee told MA that the “timescales were very complicated” and claimed that their pubco had not helped things by only just meeting the deadlines required for the process. They also told MA that the MRO offer they had been given was more than double their current tied rent, because it was based on the fair maintainable trade of sites that were not its equivalent.

Pubcos were always unlikely to be enthusiastic about the prospect of tenants taking the MRO option. Ei for one has estimated that it will suffer an 18% reduction in net income from each pub that goes free of tie by taking the MRO option.

The authority to step in

Irrespective of potential net income loss, the legislation is there and the pubcos need to stick to it. If they don’t, the PCA is authorised to step in.

However, as Nicholls points out: “The lack of clear guidance on key legal issues and treatment of MRO compliant agreement by the PCA means there have been considerable delays in cases being heard by the PCA. In some instances, cases expressing MRO interest last summer have yet to be concluded. It is vital that we start to get substantive cases heard.”

She said it was “vital” that the impact of the code and the interest in free of tie arrangements was not judged only on the numbers concluded, but on discussions as a whole and the progress of expressions of interest through the system. “We are pleased the PCA are now investigating this,” she added.

Of course, the pubs code is about more than just the MRO option. The BBPA’s Brigid Simmonds is quick to point out that there are several options available to tenants through the code.

“There are a variety of agreements out there that are not MRO and provide tenants with more choice.

“Rather than seeing the lack of MRO agreements as a negative, we believe that supply agreements benefit both partners, when compared with pure commercial rent agreements,” she said.

It is still early days and there is so much more to the pubs code than MRO. Yet, ultimately, those tenants with MRO trigger events coming up will be hoping that MRO leases start to flood through in the coming months to ease what has, so far, been a painstaking first year for the legislation.