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
225
Ev 246 Back
226
Ev 158 Back
227
Ev 258 Back
228
Ev 107 Back
229
Q 301 Back
230
Ev 195 Back
231
Ev 187 Back
232
Q 180 Back
233
Ev 192 Back
234
Ev 223 Back
235
Ev 251 Back
236
Ev 223 Back
237
Ev 265 Back
238
Ev 166 Back
239
Ev 166 Back
240
Ev 99 Back
241
Ev 197 Back
242
HC (2004-05) 128-I para 158 Back
243
HC (2004-05) 128-I paras 204-5 Back
|