In July 2016, parliament passed legislation introducing the market-rent-only (MRO) option, as part of a statutory pubs code, to govern the relationship between lessor and lessee. An independent pubs code adjudicator (PCA) was also appointed to police it. It affects pub-owning businesses (POB) with an estate of more than 500 pubs, and granted tied lessees the right to be offered a free-of-tie deal after certain ‘trigger events’.
Guy Simmonds managing director Stephen Taylor says the legislation was drawn up to “level the playing field” between tenants and POBs.
“It has long been argued by tied tenants that the premiums charged for tied supplies are excessive thereby damaging the publican’s gross and net profits. Direct comparison of equivalent businesses between the tied and free-of-tie sectors would suggest the tied sector in practice offers little or no subsidy on rents, and that support for the tied lessee, according to these tied lessees, is often of little tangible value.”
In Taylor’s words: “with supply margins being such a significant contributor to pubco profits, the introduction of the pubs code and MRO did not see the popping of Champagne corks in the boardrooms of the UK’s pubcos.”
Complicated process
However, Savills director of licensed leisure Tony Hunter suggests that Champagne corks may have been in shorter supply on the floors of tied pubs had the complexity of the MRO application process been known at the time. “When it was first announced a couple of years ago everybody thought ‘this is going to be easy’ and it’s not. Not at all.”
As Stephen Owens, Christie & Co pub and restaurant division’s head of valuations, puts it: “The procedures are hellishly complicated.”
Taylor says that lessees looking to wriggle their way free of tie via the process created two summers ago have become frustrated by the process and the delaying tactics of pubcos. “The fear among tied tenants was always that rents would simply be raised to compensate pubcos for the profit lost on supplies.
“According to some tied lessees, some pubcos are apparently trying to exploit their right to take pubs back under direct control at the cost of compensation related to rateable value instead of the premium that tied lessees may be able to achieve on the open market.”
Publicans applying for MRO often feel as if they’re working against pubcos, which are more thoroughly versed in the application procedure than they are, with frustration often leading them to question the actions of the PCA.
Taylor adds: “Tied lessees are also concerned that in addition to their perceived strategic manoeuvres of the pubcos’ frustrating the take-up of MRO, they also raise questions as to the independence of the PCA.
“It is claimed that exercising their rights under MRO is proving so problematic for tied lessees that many are simply taking the line of negotiating the best deal they can under the terms of a continuing tied lease.”
Costs time and money
Owens says: “There are various time scales that apply throughout the process and if those time scales are missed, effectively the MRO rights are lost.”
Tenants should be prepared for the ability of an MRO application to consume both time and money, warns Hunter. “The cost of it is sometimes prohibitive. Tenants have got to put aside some money to be able to go through the whole procedure. A lot of them are put off when the response that comes back from the pub company is a mass of information.”
This is in part down to the fact that pub companies generally send a schedule of dilapidation and a list of costs including things like a three-month deposit, three months’ rent up front and legal fees.
Hunter says: “A lot of tenants, with an average pub, are looking at, on average, a £50,000 bill excluding any dilapidations, just to get the thing up and running – albeit that some of that is rent up front and some of that is rent deposit – which is prohibitive for most tenants.”
MRO trigger events
“Effectively, there are four main trigger events that enable a tied tenant to serve an MRO notice on the pub-owning business,” according to Owens. “The first is a rent review – your normal rent review under the terms of an agreement.
“Second is a tenancy or lease renewal. Third is where there is a significant increase in the price a tenant pays for tied products – it’s suggested that is 3% above consumer price index.
“The last reason is when there’s a material change of circumstances. For example, if a pub is close to a major employer and that employer closes down.”
Owens adds that a flow chart published by the PCA has done a great job in unravelling the potentially complicated process.
Talking through the PCA document, Owens says: “The tenant serves notice on the pub company. The pub company is then obliged to acknowledge that as soon as possible and send a full response within 28 days. Assuming this is not being referred to the pubs code adjudicator, the flow chart thereafter regards it as a rent review dispute or a rent dispute.
“There’s a period of negotiation allowed for, where the pub-owning company and the tied tenant need to agree the rent. After 28 days, the tied tenant can call upon an independent assessor – either appointed between the parties or in the event that they can’t agree it can be referred to the adjudicator.”
The PCA’s IA factsheet and IA flowchart both explain the processes for appointing independent assessors, including timescales and the PCA’s role
Information to provide
Based on the assumption that an independent assessor is appointed, there’s various information that both the tenant and pubco have to provide. This includes a copy of the MRO compliance agreement, either party’s trading information and the assessment of trade upon which MRO rent should be based.
Owens continues: “You’ve got a 28-day period for them to supply the information and then the independent assessor has a further 21-days to make their rent determination. Then, if the tenant or pub-owning body are unhappy, there is the ability to refer that back within a further 14-day period to the pubs code adjudicator.
“They can then choose to uphold the assessment or refer it back to the independent assessor or decide to appoint another independent assessor. There is an appeals process within this procedure. Once the MRO rent has been assessed, there’s no obligation for the tenant to take up an MRO agreement, they can always fall back on the tied rent.”
Don’t go it alone
A costly process governed by tight deadlines, publicans seeking MRO are advised against going it alone.
Savills’ Hunter says: “We would suggest that they employ a surveyor who knows what they’re doing, and also have a chat with a solicitor, maybe not actually go ahead, but to understand the implications of it and make sure everything is absolutely hit rigorously. The problem is there aren’t many solicitors who are actually involved in it. There are a couple that are very heavily involved that I’m now putting people towards, or suggesting they at least have a chat with.
Owens adds: “Because the timing is complicated and there are a number of scenarios from a tenant’s perspective, it’s quite important that they seek advice or make sure that they’re familiar with timings because they are critical and if they miss some of these dates, effectively, they lose their right to an MRO agreement.
“Generally, pubcos will be represented by an expert. They will choose to appoint somebody to present their case on their behalf. That is invariably a chartered surveyor who has knowledge of licensed valuation and they will provide their opinion of trade and use various benchmarking statistics.
“While the independent assessor will come to his own decision, a tenant might want to think about engaging somebody who can present their case in a similar way.
“It doesn’t necessarily mean they’ll be disadvantaged if they don’t, but they should be aware that pubcos will invariably have experts acting on their behalf.”
To find out more about pubs for sale, lease and tenancy visit our property site.