Our Report deals with the relationship between pub companies and their lessees. There have been many recent reports about the decline of the pub as an institution; we do not pretend to deal with all the issues raised by this work. It is clear there are many pressures on any retail business, and pubs are challenged by changing consumer preferences, changes in the regulatory framework and general economic circumstances. The problems of the pub industry cannot all be attributed to a particular ownership model. Our investigation has had a very specific focus.
We were particularly interested in those companies which operate a tied estate, whose operations have frequently been criticised on the grounds that they are unfair to lessees, who not only have to pay rent, but are also forced to buy beer at higher prices than those they could obtain elsewhere. Those who support the system maintain that the tie gives pubcos an incentive to support their lessees through providing advice and services, and that the revenue stream from the beer tie means that basic rents are lower than they would otherwise be, and potential lessees have a low cost entry into the business.
The Trade and Industry Committee's 2004 Report considered that there was a balance between disadvantages and the benefits of the tied system, although there was an imbalance of bargaining power between pubcos and their lessees. The Committee put forward a number of recommendations intended to improve the relationship between the two parties, and we were interested to see the extent to which those recommendations have been implemented, and the extent to which problems had been solved.
Our call for evidence gave us two irreconcilable pictures of the industry. The first presented a picture in which pubcos operating the tie were able to give their lessees considerable support, and in which the admittedly higher costs of tied products were offset by lower rental and extra support and services. The second picture, which came from individual lessees and from campaign groups, was of an industry in which the higher costs imposed by ties meant that lessees were at a disadvantage to free of tie competitors and pubcos used their superior bargaining power to exploit lessees, in many cases failing to carry out their contractual duties, while refusing to give lessees in difficulties any leeway.
Evidence was submitted by lessees of many pubcos, and we were concerned by the consistency of their stories. On the other hand, disputes between lessees and landlords are not unusual, and we recognised that a satisfied lessee would be less likely to contact the Committee. Accordingly, we commissioned our own survey to determine whether the evidence we received from individual lessees was typical of feelings in the industry, or whether it was the result of particular individual problems. Our investigation showed that the majority of lessees of tied pubcos did not consider their pubco added value to them and were dissatisfied with their pubco; 78% of lessees were dissatisfied with the tie. 67% of lessees who responded to the survey said that they earned less than £15,000 per annum. Even where pubs had a turnover of more than £500,000 a year, over 50% of lessees earned less than £15,000. Although we could not investigate the stories told by individual lessees, the survey results gave us confidence that although their cases might be extreme, they were not simply a dissatisfied minority.
The problems the Trade and Industry Committee identified four years ago remain. The imbalance of bargaining power persists. The arrangements for assessing rents remain opaque, despite the Trade and Industry Committee's recommendations for greater transparency. Rental assessment should be the basis for negotiation, but incumbent lessees often risk loss of their home as well as their business if they cannot reach agreement. Despite the introduction of improved codes of conduct, there appears to be no effective independent dispute resolution system; only now is such a system being considered. While we are sure that in some cases pubcos have acted fairly and even generously towards their lessees, in many cases they take full advantage of their economic strength. There is a worrying pattern in the evidence presented to us of lack of support for lessees, of verbal agreements not honoured, and, on occasion, of downright bullying.
We have no confidence that the advantages of the tie outweigh its drawbacks. There is an easy way to test this; as leases become due for renewal, the pubcos could and should offer lessees a choice between a free of tie lease and a tied one. This would only be effective if the basis on which rent was assessed was made more transparent.
Given the industry's inability to reform itself in the past, BERR needs to look urgently at the inequalities of bargaining power between pubcos and lessees. Recommendations to improve the transparency of rent assessment should be implemented. The practice of pubcos selling buildings they no longer require with restrictive covenants preventing their use as a pub should be banned.
There are strong indications that the existence of the tie pushes up prices not just to lessees but to consumers. However, we are wary of simply recommending that it should be abolished; such a move might simply increase the power of brewers or distributors. The OFT has declined to act in the past; we recommend that the Secretary of State refer the matter to the Competition Commission for urgent investigation by a body which has no vested interest in defending its earlier position. However, our provisional view is that the tie should be severely limited to ensure there is proper competition in the market. Nonetheless, we note that interventions can have unexpected consequences. The Beer Orders led to the emergence of pubcos. Displacing pubcos without considering the market as a whole may put too much power into the hands of brewers and wholesalers. The position of local brewers operating a small tied estate also needs to be considered; we would not wish to damage regional brewers. For these reasons we recommend an urgent investigation, rather than simply making a policy recommendation.