Select Committee on Trade and Industry Second Report



72. Prospective licensees have three models to choose from: to become the licensee of a managed public house, to purchase a freehold public house (free house operator) or to become the tenant of a pubco's public house.

73. Choosing to become the retail operator of one of the 12,000 managed public houses gives an individual limited operational freedom as the landlord sets the retail price for beer sold on the premises. The manager has no say in the brands of drink stocked and limited input into the additional amenities offered to customers. Operators who purchase the freehold of one of the 17,000 freehold public houses have complete operational freedom. They decide how to run their business without the support or intervention of a landlord. This includes the choice of amenities on offer, the mix of brands they stock, from whom they source their products, and the retail price they charge their customers.

74. Becoming the operator of one of the pubcos' and regional brewers' 30,000 tenanted public houses gives an individual freedom to operate their business as they see fit, within the terms of their agreement. In most cases they have a choice of the amenities they provide and set the retail price charged to customers. They also select the brands they stock but, due to the exclusive purchasing obligations of their agreement, these have to be sourced from their pubco's wholesale price list, which contains a limited number of brands. There are a wide variety of tenanted public houses available for prospective licensees to choose from. These range from 'high street bars' to 'country pubs' and from food led 'gastro pubs' to more traditional drinking establishments.[85]


75. The demand for public house tenancies seems strong. There are large numbers of applicants for each of the large pubcos' available public houses. A Deutsche Bank report found Enterprise, Punch and Greene King had 900, 1,400 and 700 applicants respectively for the available 17 percent, 31 percent and 61 percent of their respective estates. The ratio of demand for tenanted public houses to those available for lease was three to one in the case of Enterprise, two to one in the case of Punch and almost two to one in the case of Greene King.[86]

Low costs of entry

76. The ALMR told us surveys had found the main reason tenants chose to lease pubcos' public houses was because they were unable to purchase the freehold of the public house, because either it was not available or it was too expensive to do so.[87] As the purchaser of a free house, the operator has to fund and service the full capital costs of their public house. They may finance their purchase through a bank loan but this is usually limited to a maximum of 70 percent of the property's value.[88] Pubcos told us that becoming one of their tenants provided a relatively low cost entry into running an on­licensed business, as the capital asset, the public house, was provided by them.[89]

77. There are two ways to become the tenant of a public house tied to one of the pubcos. Incoming tenants can either take on new leases direct from a pubco or they can take over the remaining lease (short term tenancies are non-assignable) of an incumbent tenant on assignment. The proportion of pubcos' tenants entering public houses through each method varies from pubco to pubco. For one of the larger pubcos, around 47 percent of new tenants enter through new agreements while 53 percent choose the assignment method.[90]

78. Ingoing tenants entering a new lease with a pubco only have to purchase the trade fixtures and fittings (tables, chairs and 'bric-a-brac'), provide a deposit for rent and stock ordering, and capital for stock and glassware. Ingoing tenants who enter through assignment also have to pay the outgoing tenant an assignment premium ('goodwill'). For free house operators this premium is included in the freehold value of the public house.

79. Our witnesses provided us with estimates which showed pubcos' tenants' ingoing costs were 10 to 14 percent of those of a free house operator.[91] Pubcos told us the other costs of entry were similar but the economic cost of the property during the life of a lease would, for many tenants, also be cheaper as free house operators financed all repairs and maintenance themselves.[92] For many tenants, this was the responsibility of their landlord. In addition, many tied tenants had access to cheap loans. By contrast, free house operators had to source working capital for themselves, often at a higher rate of interest than was available to pubcos' tenants.[93]

Pubcos' agreements with their tenants

80. The relationship between pubco and tenant is formalised through an agreement known as the lease. Each pubco offers a choice of leases, varying by type in length and conditions. The main conditions of these agreements are the repair and maintenance obligations, the ability to 'sell on' the lease (assignment) and the degree to which tenants are obliged to purchase products from their pubco—the so called 'beer tie'.

81. The extent of the tie conditions in tenants' agreements determines the way in which their 'rent' is collected. Pubcos derive their income (total rental value) from public houses through three very different but related revenue streams. The wholesale profit (sometimes referred to as the 'wet rent') is the differential between the prices they pay their suppliers for tied products and the wholesale price for which they sell them on to tenants. Income from amusement with prizes machines (AWPs) in some cases goes solely to the pubco or the tenant but generally is shared equally. The dry (commercial or property) rent charged is decided by the pubco at the beginning of a lease and is subject to review at regular intervals. Together, these three streams of income plus any additional benefits offered by a pubco should equal the 'rent' which would be paid by a free from tie tenant.[94]

82. The income mix for each pubco differs. Enterprise estimated for a public house trading 240 barrels per annum and earning them £3,000 in AWP income, their mix was 49 percent dry rent, 43 percent wet rent and eight percent AWP income.[95] InnSpired's income mix was 55 percent wet rent, 40 percent dry rent and five percent AWP income.[96] The mix also differed from agreement to agreement. For the Enterprise example above, in cases where AWP income went exclusively to the tenant,[97] the mix changed to 57 percent dry rent and 43 percent wet rent.


83. There are two distinct models of tenant agreements, both refined in the 1990s: tenancies, developed historically by the national brewers and still favoured by many of the regional brewers; and the long lease developed initially by Inntrepreneur and adapted by today's pubcos.[98] Tenancies refer to short term internal repairing, non­assignable agreements, usually three years in length with the opportunity for the tenant to terminate the agreement at any time. This type of agreement is attractive to tenants who are risk averse and require greater levels of support from their pubco. Leases are longer term, typically 10 to 25 years, and are assignable with full repairing obligations. These agreements are more attractive to tenants (known as lessees) who see the proposition as an opportunity to develop a business and capitalise on any goodwill created.[99]

84. To determine the prevalence of these arrangements, we asked the ALMR to survey its members from which we estimated the extent of the tenant/lessee split. Between them, respondents owned 23,000 public houses, or just over three-quarters of pubcos' tenanted estates. Of these, 45 percent operated on short term tenancy agreements, while the remaining 55 percent operated as lessees. Of the public houses covered by the survey, just under a fifth were owned by regional brewers. Their tenanted estates' agreements were mostly of the traditional short-term tenancy type (83%) as opposed to lessee agreements (17%). In comparison, non-brewery pubcos' agreements were mostly of the longer term lessee type (64%).[100]

85. The complaints we received from tenants did not generally differ according to whether they had a tenancy or lessee agreement. We considered that the material differences between the two types of tenant did not warrant separate investigation of their relationships with their pubcos. Throughout our Report, tenants and lessees are referred to as 'tenants' except where we consider differences are substantial enough to justify distinguishing between them.


86. Free house operators bear all the internal and external repair and maintenance costs for their public house. Tenants, with long lease agreements (lessees) generally have full repairing leases. They, too, are obliged to maintain and repair the structure and inside of the building, following an initial dilapidation report and agreement from their pubco to put right any existing defects. For most tenants with tenancy agreements, the pubcos retain the responsibility for the structure but responsibility for the internal repair and maintenance remains with the tenant.[101]

Buildings insurance

87. Tenants have to pay a monthly buildings insurance premium through their pubcos to 'protect' the public house. Full buildings insurance cover is supplied through the pubco in their name and then charged to their tenants who are listed as an interested party. The pubcos argue that the cost of this insurance is usually below the market rate as pubcos use their purchasing power to negotiate lower premiums for their whole estates.[102]

88. Where problems are identified by tenants they are required to inform their pubco's customer service department, or their nominated insurance provider, immediately, and these contact a contractor of their choice to carry out the repairs. The repair process is usually overseen by a surveyor who, in the case of the larger pubcos, is one of their employees. A schedule of works is agreed between all parties and will include an insurance company loss adjuster should a claim be made by the pubco, as policies provide cover for tenants should they see a reduction in turnover following a damage loss or while the public house is closed for repair.[103] Some pubcos' agreements also contain clauses offering rent concessions during this period.[104]

89. The external repair of a public house is often crucial to its trading success as passing trade may be discouraged by premises which do not appear to be well maintained. Tenants' representatives told us: "getting the landlord to maintain the property can prove extremely difficult".[105] Disputes frequently arise due to the failure to carry out the necessary works within the agreed timescale.[106] Maitland & Walker (M&W) suggested: "litigating these issues is an expensive and time-consuming business which is not in the interests of either the landlord or the tenant".[107] A number of tenants, who asked for their names to be kept in confidence because they feared an adverse reaction by their pubco, complained about the difficulty in getting their pubco to carry out necessary repairs and the resultant damage to their business. One tenant, who was willing to be named, believed the unexpected delays in carrying out repairs and the attitude of their pubco was instrumental in her having to leave her public house business.[108]

90. From the evidence we have received, it is clear that many tenants experience problems in enforcing their pubco's duty to maintain and repair their public house. This is unacceptable. Pubcos would improve their reputation as landlords if they ensured that tenants' agreements contained an inexpensive and efficient system of arbitration or alternative dispute resolution with fully independent arbitrators or experts to resolve such disputes without imposing legal costs on either side.


91. Tenants complained it was their pubco that had benefited from tenants' investments in their business, as improvements they made increased the value of the freehold.[109] However, pubcos argued that lessees' agreements offered the opportunity for tenants to sell on (shorter tenancy agreement usually cannot be sold on) their lease to a third party after a qualifying period (usually two years). They could then realise the capital value of their goodwill and any improvements to the public house they had carried out. This sale process is known as assignment. Although tenants did not gain from the capital appreciation on the freehold, they often had an asset which was assignable and provided them with a return on their initial capital investment. Enterprise told us the average assignment premium paid to outgoing tenants was in the region of £65,000, including fixtures and fittings.[110]

92. Many of the large pubcos have assignment teams to support tenants with assistance and advice through the process of selling their business. They also provide access to their websites, where tenants can advertise their business and access pubcos' databases of applicants waiting to enter the industry.[111]

93. A further issue is risk. In times of economic stability it is easy to forget that the value of an asset can fall as well as rise. Should the value of the public house fall, the whole of the value loss is experienced by the owner, be they pubco or free house operator, whereas the tenant is largely protected. The owner is also susceptible to the impact interest rate increases would have on any outstanding debt on their property.[112] In this respect, pubcos' tenants are no different from the tenants of houses, shops or other business premises: they have to balance the reduced cost to themselves of renting rather than purchasing premises against the fact they will not reap any appreciation in the capital value of the premises.


94. Historically, each brewer incorporated an exclusive purchasing obligation in their public house leases which required tenants to sell their brewer's products alone, the so-called 'beer tie'. This restricted consumer choice and considerably limited operational freedom for their tenants. Pubcos now lease their properties to tenants through one of a number of different types of lease, which vary in conditions. The main condition is that tenants, who pre-Beer Orders were tied to purchasing beer products from their premises' brewer-owner, now have to purchase their beer products from their pubco. These are supplied at a price decided by the pubco and not the open market. Unlike the brewers post Beer Orders, many pubcos are also able to tie non-beer products such as cider and spirits.[113]

95. To ensure that their tenants do not purchase beer outside their tie, pubcos employ flow monitoring systems and regular 'surprise' searches by external agencies. Tenants have a legal obligation to allow such searches as pubcos, as landlords, enjoy the 'company's right of entry' into their premises. Because of the tie, competition for pubcos' tenants' business between the company's nominated supplier and other suppliers is precluded.[114]

96. Pubcos suggested to us that they continued to use the beer tie as it enabled them to negotiate supply contracts with a wide selection of beer and other drink suppliers. This provided their tenants, and consumers, with a greater choice than was available in the past. Only in this way would pubcos be able to offer their tenants "certainty of product range, price and distribution; to afford services and investment to benefit the retailer; and to agree rents based on an equitable division of the available retail profit".[115]

Lack of information for prospective tenants

97. We received evidence which suggested prospective tenants were not being provided with the quantity or quality of information needed to make a rational decision on the merits of a lease proposal.[116] Morgan Stanley carried out a survey asking tenants to rate their pubcos' performance on various measures relating to the advice given or offered prior to signing their lease. They found a quarter of tenants rated their pubco as less than satisfactory for how well they explained their lease, with only seven percent rating them as excellent. A third of tenants rated their pubco as less than satisfactory for disclosing all relevant information. A similar proportion rated their public houses' profitability compared to initial expectations as less than they expected. 35 percent of tenants said they were not given enough time to check they were happy with their contract before signing their lease.[117]


98. The pubcos suggested to us that they provided the necessary information required by prospective tenants during their recruitment processes.[118] Once approached by interested applicants, those who had access to the internet were initially directed to pubcos' websites. Prospective tenants who did not have internet access were provided with paper based information. This provided an analysis of the 'pros and cons' of running a public house, the available alternatives and the potential pitfalls. The information provided also took a prospective tenant through the process of applying for a public house, the costs, the legal work, and what actually happened over the first six months of being a pubco's tenant. If, having read this, applicants wanted to proceed they submitted a formal written application to the pubco.[119]

99. Pubcos then go through a formal application process with a prospective tenant, involving: an initial screening telephone interview; a general interview with a business development manager (BDM); a credit check of the tenant; a second interview, focussed on a specific public house, involving a business plan analysing the performance of the property based upon the rent proposed[120] and an audit of the applicant's key skills; then follow up interviews continue with business plans for a number of public houses and a variety of leases until a match is found.[121] Punch described this process for both sides as "extremely rigorous and from those who progress from initial interest to actual application, we get an average 26% dropout rate, due to our rejecting them or their withdrawal once they fully understand the implications of running a pub".[122]

100. We asked our pubco witnesses what level of information they provided for prospective tenants once a particular public house and complementary lease agreement had been selected. Mr Tuppen, the Chief Executive of Enterprise, believed "the information available to licensees is complete. They [prospective tenants] know or have the ability to find out everything they could possibly need to know in order to run their business".[123] Further, they provided historic barrelage information (volume sales of beer), full wholesale price lists, and the lease itself, which detailed the rent payable and the rent review process. The Chief Executive of Punch confirmed they, too, provided this information.[124]


101. Enterprise suggested some of their tenants might not have received all the information they needed, especially in cases where their tenants' leases had been assigned. Tenants wishing to sell their public house business, through the assignment of their lease to a third party, are under no obligation to provide prospective tenants with information. The Chief Executive of Enterprise suspected "there will be a strong correlation between those who have come to you with complaints, those who have failed to prepare a detailed business plan and, indeed, those who took the lease on an assignment".[125]

102. Several witnesses suggested that in the purchase of any other business it is standard practice for the historic profit and loss accounts of a business to be made available to the purchaser.[126] Unfortunately, the profit and loss account of each tenant is not known by pubcos as there has never been a requirement in their agreements to share such information. Tenants generally keep these details confidential from their pubco.[127]

103. Large pubcos offer tenants the right to information should they choose to look for it. However, many prospective tenants are unaware this information exists. This appears to be particularly true of those who become tenants through taking leases from incumbent tenants on assignment.

104. Judging from Punch's and Enterprise's descriptions, their approach to the application process and the type of information supplied appears to be extremely thorough. It may well be that not all pubcos follow best practice. However, prospective tenants must take some responsibility themselves. Prospective tenants should make themselves aware of the information available to them from the pubco before committing to a lease. If there is information prospective tenants believe should be available but is not, they should ask the pubco for such information. If the information is not forthcoming, then prospective tenants should look to other companies.

105. We are aware that pubcos, as landlords, do not have the right to unreasonably withhold consent to assignment by tenants[128] and can only offer advice to these prospective tenants. Pubcos should insist that tenants assigning leases provide prospective tenants with the same level of information that their pubco would provide.

106. Prospective tenants entering the trade through lease assignment should not sign agreements until they are fully aware of an incumbent's annual profit and loss accounts for the business they are purchasing. They should also contact the pubco for information they believe is not forthcoming from their assignor.


107. All parties, including the pubcos, expressed concern that prospective tenants were failing to take the correct legal advice before committing themselves to lease agreements.[129] Morgan Stanley found 40 percent of prospective tenants took no legal advice before signing their contracts. Only 42 percent said they were encouraged by the pubco to do so and 63 percent were not asked by their pubco whether they had.[130] M&W told us that in their experience tenants who became involved in business failure or disputes with their landlord had not only failed to obtain proper legal advice when taking their lease but had also failed to obtain adequate accountancy advice. These tenants had also not obtained valuation advice or had not commissioned a survey report on the condition of the buildings, even when they took a full repairing lease.[131]

108. We asked the pubcos what assurances they demanded from tenants that they had taken legal and other professional advice. The Chief Executive of Punch told us they "strongly request that they [prospective tenants] take legal advice".[132] The Chief Executive of Enterprise told us their prospective tenants were "subjected to a positive barrage of reminders to take independent advice. On no less than four occasions are they reminded of this in writing".[133] These were: at the time of their application when they received Enterprise's code of practice; the advice Enterprise gave prospective tenants to aid them in completing their business plans; at the time of offering a specific public house; and at the time of their agreement proposal.

109. Pubcos asserted that no matter how hard they attempted to get prospective tenants to take independent advice they did not always do so.[134] Mr Payne, the Chief Executive of the Federation of Licensed Victuallers (FLVA), confirmed this by telling us that tenants were advised by pubcos "to get advice, to get a solicitor, an accountant but a lot of them will run in and sign because they want the pub".[135] The FLVA found when they asked pubcos for information they were always sent the information they required. To combat prospective tenants' lack of prudence, the Chief Executive of Enterprise proposed to make the taking of independent advice by prospective tenants mandatory. In these cases, they intended to pay for, or at least contribute towards, the costs of advice.[136]

110. Prospective tenants should seek independent professional advice before committing themselves to a lease agreement. This should not be limited to legal advice but should include advice from a suitable accountant with expertise in the licensed trade and a qualified surveyor with experience in valuation in this sector.

111. We believe that many of the disputes which arise between pubcos and their tenants would be eliminated if pubcos insisted as a condition of acceptance that tenants obtained all necessary professional advice. This should be one element of an industry­wide code of practice. We also strongly commend the example set by Enterprise in proposing to contribute to the cost of this. In the long run, ensuring that tenants know exactly what they are committing themselves to when they take on a lease will be to the benefit of the reputable pubco itself, as well as to its tenants.

85   Appendix 23, Annex A Back

86   Deutsche Bank, UK Pubs Sector Report - The bear pit, 31 October 2003, Figure 31 Back

87   Appendix 1, para 16 Back

88   Appendix 3, para 5.3 Back

89   Appendix 23, para 97 Back

90   Appendix 2, para 10 and Appendix 10, page 2 Back

91   Appendix 23, para 94 Back

92   Ibid. para 92 Back

93   Appendix 3, para 5.9 Back

94   Appendix 12, para 3.1 Back

95   Appendix 8, Annex 4 Back

96   Appendix 16, para 1.4 Back

97   Currently 46 percent of Enterprise's estate. Source: Appendix 10, para 27  Back

98   Appendix 1, para 13 Back

99   Appendix 23, para 84 Back

100   Appendix 2  Back

101   Appendix 3, para 5.13 Back

102   Appendix 23, Annex G  Back

103   Ibid. Back

104   See Appendix 19, Section 6 Back

105   Appendix 17, para 4.16 Back

106   For example see Appendix 19 and Appendix 15, para 8 Back

107   Appendix 23, para 465 Back

108   Appendix 19, Section 6 Back

109   For example see Appendix 21 Back

110   Appendix 8, para 2.7 Back

111   Appendix 23, Annex G  Back

112   Ibid. para 96 Back

113   Appendix 23, para 10  Back

114   European Commission Decision 2000/484/EC, Case IV/36.492/F3, Inntrepreneur (OJEC (L) 2000 195/49 para 49) Back

115   Appendix 23, para 120  Back

116   For example see Appendix 15, Appendix 19 and Q 62 (Ms Newport) Back

117   Appendix 20, Annex 2 Back

118   Appendix 8, para 3.1 and Q 339 Back

119   Appendix 23, para 132 Back

120   Assistance for prospective tenants in compiling their own business plans is usually provided on pubcos' websites or in hard copy Back

121   Appendix 23, para 254 Back

122   Ibid. para 135 Back

123   Q 339  Back

124   Q 538 (Mr Thorley) Back

125   Q 327 (Mr Tuppen) Back

126   For example see Appendix 17, para 5.10; and Appendix 23, para 451 Back

127   Appendix 23, para 104 Back

128   Under Section 19 of the Landlord and Tenant Act 1927 as amended by Section 1 of the Landlord and Tenant Act 1988 Back

129   For example see Q 282 - 286 (BBPA) and Q 108 (A.B. Jacobs) Back

130   Appendix 20, Annex 2, table 13 Back

131   Appendix 23, para 449 Back

132   Q 538 (Mr Thorley)  Back

133   Q 326 (Mr Tuppen) Back

134   Ibid. Back

135   Q 167  Back

136   Q 326 Back

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