House of Commons - Pub Companies - Business and Enterprise Committee

Pub Companies - Business and Enterprise Committee Contents

5 Dispute resolution

140. The Trade and Industry Committee noted that its inquiry had come about because of "complaints about inequalities in the contractual relationship between pubcos and their tenants." Many lessees are small business people entering into agreement with big corporations with far greater financial resources than they have available. A lessee is tied into a lease with a pubco who can increase prices and change conditions if and when they please. The lessee's negotiating position is weak — if they cannot reach agreement, they will have to try to leave the lease which comes with huge cost and family upheaval as often pubs are also their homes. Our predecessor Committee recommended that there was a need for an inexpensive and efficient system of arbitration or alternative dispute resolution to resolve disputes without imposing legal costs on either side.[217] This has not happened.

141. The area of particular contention between pubcos and their lessees is rent reviews. In the 24 months to September 2008, out of 2,687 rent reviews completed by Enterprise, 15 were referred to independent determination for settlement, of which nine have now been settled.[218]Similarly Marston's had only two cases go to arbitration.[219] Greene King said it had not entered into any arbitration as part of the rent review process.[220] Pubcos use the low number of dispute cases as evidence that the model is working and that rents are fair.[221]

142. Our survey found that 20% of lessees considered that they had had a 'dispute' with their pubco — that is one in five respondents. Of those only 18% were satisfied with their pubco's resolution methods.[222] This suggests that the small number of cases pursued to independent arbitration should not be taken as a sign that all is well. It could simply demonstrate that, even though they were dissatisfied, lessees did not consider the dispute resolution system appropriate. Simon Clarke explained:

you have to consider the weight of the parties, particularly with a pub. On the one hand you have a tenant who is probably a one-man band operating his own pub, he does not have a great deal of time, he probably has not got a lot of comparables to work on. On the other hand you have a potentially multi-million pound company that has an open cheque book, a rent review department specialising in purely this sort of thing. The weight is against the tenant at the outset.[223]

143. In general, if a lessee is in dispute with their pubco there are two methods which can be used to resolve the disagreement: expert determination or arbitration. However both are costly and have their advantages and disadvantages. The BBPA presented the following explanation of the two methods to us:

Table 12: Dispute Resolution Methods

Arbitration Independent Expert Determination

Cost £24,000 - 30,000 £5,000 - £10,000

Division of Fees In arbitration there is always the risk that the losing party can end up paying everything, which can be as much as a total of £25,000 - £30,000 of fees. The expert will charge an hourly rate for his or her time, and will bill it 50/50 to the parties. The award will not be released until payment is made in full.
The expert has no power to order either party to pay the costs of the other if there is a perception that either party "won".

RICS RICS-qualified personnel can act as both independent expert or arbitrator - the difference is the set of rules they are working to

Law An arbitrator is bound by the Arbitration Act. The expert can act as the parties agree they want him or her to, so long as the expert agrees.

Evidence An arbitrator is bound by the Act to use only the evidence presented by the parties. An expert is not bound by the rules of evidence that bind an arbitrator under the Arbitration Act. The expert can be more flexible about allowing evidence such as the lessee's own trading accounts, which are usually excluded in arbitrations.
The expert can bring his or her own knowledge into play. This makes it possible for an unrepresented lessee, or one who has no evidence to put forward, to get an independent review of their rent without incurring the cost of employing a surveyor to make their case as would occur at arbitration.

Justification An arbitrator will usually give reasons for the amount of the rent award. An expert will usually just give a figure.

Appeal Arbitrations can be appealed to Court. If either party thinks there has been a mistake in the award, the expert can be held personally liable for any negligence, but the amount of the award cannot be appealed to the High Court. It is absolutely binding on both the parties.

Source: Ev 190

BBPA told us that only 18 rent reviews went to arbitration between 2004 and 2008 (0.3% of rent reviews undertaken during that period). Of these approximately 70% were found in favour of the pubco.[224]

144. Lessees and their representatives have told us that the cost of these methods was too expensive and deterred them from taking action. David Morgan even implied that the cost was used by pubcos to their advantage:

I have first hand knowledge of BDMs/BRMs stating that if arbitration is sought, the tenant will incur many thousand pounds worth of expenditure and in every instance, the pubco will win and their associated costs will also be added to the costs of the tenant. These scare tactics regrettably often have the effect of frightening a supply tied leaseholder into not seeking third party referral as a result of the threat of an horrendous cost burden.[225]

Indeed one lessee told us:

My BDM's response to our refusal to sign [the] rent agreement was a blatant verbal threat to withdraw the rent offer and take us to arbitration where he stated I could expect to have an increased figure imposed on me and payment of that increase backdated.[226]

However one lessee faced with an increase in rent told us:

We are racing towards arbitration which we can ill afford […]. It is obviously cheaper for us to accept the £1,400 rise and save thousands but it feels wrong when we are placed under such tough operating conditions.[227]

145. Enterprise did agree that arbitration costs were potentially a problem:

the high cost of arbitration may be prohibitive for some licensees and (we) recognise the need for a low cost, easy access process by which rent review negotiations may be independently resolved.[228]

BII low cost dispute resolution system

146. Punch, Enterprise and RICS all referred in their evidence to the piloting of a low cost dispute resolution system by BII. Enterprise said:

the solution lies in support, which we give unconditionally, for the BII proposal to produce a £1,000 fixed-cost professional arbitration system. Now, we support this entirely and we are working with them.[229]

147. We were surprised that BII had not given any details of this in its written submission nor when its Chief Executive John McNamara gave oral evidence, and asked for more information. The BII told us they had run rent review road shows in 2008, and from these it had become clear that disputes over the rate of rent were a cause of concern for members. The BII undertook to look into creating an Independent Expert Determination service which would have the objectives of being: transparently independent; at a relatively low fixed cost; and binding on both parties. It has since set up a steering committee to determine the feasibility of such a scheme and to consider how it would work in practice. When the work is completed the proposal will go before the BII National Council to decide if the project should continue and how it would be funded and resourced.

148. At present the BII scheme envisages that an independent expert's fees would be fixed and shared between both parties and it is proposed that the licensee's share of the fee would be between £1,000 and £2,000 based on a sliding scale of current levels of rent. The BII concluded:

It will benefit the licensee by taking the unknown cost out of the equation. He/she will have the peace of mind that the valuer will be chosen from a BII panel of RICS experts and finally the decision will be binding giving a clear independent outcome.[230]

149. We agree that some form of low-cost independent procedure for dealing with disputes over the rate of rent is needed and needed urgently. The BII's proposed dispute resolution system in which fees will be known at the outset, and will be related to rental value is, in principle, welcome. We would be more confident in the prospects for the successful implementation of the BII's proposal if the Trade and Industry Committee had not recommended precisely such a procedure over four years ago. We are astounded that nothing has yet been done.

Complaints

150. What is also striking is that lessees have few avenues of complaint if they believe that their pubco is acting unfairly. BBPA said in written evidence that it would act as an 'intermediary to resolve any misunderstandings' in the Code of Practice but it had 'received no request to act in this capacity'.[231] However in oral evidence Rob Hayward said:

we have never dealt with a case specifically because we are, as has been indicated, a membership organisation of companies and therefore we would expect the individuals to seek advice elsewhere, and I have on occasions advised them so.[232]

151. The BII also offered to intervene if a pubco breaks a code of practice. BII said:

Whenever complaints are received in relation to alleged breaches of accredited codes, the matter is taken up with the senior official at the named pub company. Since the scheme started BII has had to investigate three cases, all of which were resolved to the satisfaction of the lessee/tenant.[233]

Lessees have little confidence in either organisation. We have received evidence questioning both the positions of the BBPA and the BII and their relationship with the pubcos, from organisations such as Fair Pint[234] and Justice for Licensees.[235] Fair Pint told us:

The BBPA claims that it "is the leading organisation representing the UK beer and pub sector. Our members account for 98% of beer brewed in the UK and own more than half of Britain's 58,000 pubs." In reality it is merely the trade association for pubcos and brewers. In fact, Simon Townsend, Chief Operating Officer for Enterprise Inns, is currently the Chairman of the Communications Group of the BBPA. The BBPA represents the interests of those that own the vast majority of the pubs in the country, but actually run very few. None of the BBPA's members are individual tenants.[236]

A lessee said she has written twice to BII asking for an investigation of Enterprise's codes of practice and never received a reply. She told us:

I feel that the BII cannot and will not involve themselves in areas of dispute with the pubcos and feel that this could be due to the large revenues that the BII receive from the pubcos for the BII training packages. If the BII earn revenue from the pubcos then surely there has to be some conflict of interest.[237]

Legal remedies

152. The courts are ultimate arbiters in commercial disputes. They will be wary of meddling in business contracts where equality is implied. As Punch stated "It must also be remembered that licensees enter into a tied lease freely and of their own accord"[238] and that "licensee naïvety and poor judgement should not be construed as exploitation by the pub companies".[239] Enterprise said: "it must be understood that every individual contract between ETI and a tenant or lessee is initially negotiated and agreed by both parties".[240] Marston's said "Any tenanted/lease agreement is a commercial agreement that is signed by the operator at the start — from a tenanted perspective they are not forced to enter the agreement."[241]

153. While a consumer is protected by the unfair contract terms regulations, there is no such protection in business. In many cases this is justified, but it may not be so if one party to a contract is far weaker than another. Considering each party to a commercial contract to be equal is reasonable if both parties have access to the same information and resource but it has become clear from this inquiry that the pubcos have access to a far greater level of both. In such cases the normal legal assumption of equality of bargaining power in commercial contracts may not be appropriate.

154. Our predecessors recognised the imbalance of information and resources between pubcos and their tenants and said:

The pubcos have argued that if tenants do not agree with their rent assessment, they should not have entered into the lease or accepted the rent review. We do not share this view. In the relationship between pubco and tenant, the tenant is in the weaker bargaining position. Pubcos should recognise that they have a responsibility to ensure they do not exploit their position of economic strength. All tenants should be treated fairly and rents should be reasonable and sustainable.[242]

155. The report concluded that

At this stage we do not think a legally binding code of practice necessary, but if the industry does not show signs of accepting and complying with an adequate voluntary code then the Government should not hesitate to impose a statutory code on it.

We hope that our successor Committee in the next Parliament will review the situation in the public house industry, in particular whether the code of practice is working.[243]

Conclusion

156. The BBPA's Framework Code of Practice and the recommendations of the Trade and Industry Committee have not solved the problems of inequality in bargaining power and inadequate means to resolve disputes identified in 2004: we believe that more is now needed.

157. Our inquiry has inevitably attracted evidence from dissatisfied lessees. We have tried to counter that by being as open as possible to the pubcos, and by commissioning our own survey. We note that in our survey results some pubcos fared better than others. It is clear from our evidence that some lessees act recklessly, or enter into business without due diligence. That is not the pubcos' failing. Nonetheless, the pubco model should be based on a share of risk and reward. That may be the case in some circumstances, but the two parties to the contract have vastly differing bargaining power. The financial data from our survey suggests that for a great many lessees, the risk remains with them while the lion's share of the profit goes to the pubco. We are not saying that all, or even any, pubcos abuse all lessees all the time, but it is clear that not only is there potential for abuse, but also that abuse occurs.

158. Consumers are protected from unequal bargaining power by the unfair contract terms legislation. The law assumes that both parties to a business contract have equal resources and expertise. This is clearly not the case here — but if a pubco tried to enforce its contract through legal proceedings, courts would be very reluctant to determine whether those contract terms were fair because of the presumption that commercial contracts are made between equals. We recommend that the Department for Business and Enterprise urgently explore ways of ensuring that there are safeguards to prevent inequalities of bargaining power in business contracts being abused.

217 HC (2004-05) 128-I para 204 Back

218 Ev 100 Back

219 Ev 200 Back

220 Ev 205 Back

221 Ev 102 Back

222 Ev 311 Back

223 Q 80 Back

224 Ev 190 Back