Memorandum submitted by the All Party
Parliamentary Save the Pub Group
THE KEY
ISSUES TO
ADDRESS
1. The market dominance of the huge Pubcos.
2. The supply tie or "wet rent".
3. Rent.
4. Problem with access to market for smaller
(inc. more local) breweries which restricts customer choice.
5. Restrictive covenants.
6. Automatic right to buy for lessees and
for communities.
INTRODUCTION
The Save the Pub Group is extremely concerned
about the way the tied tenancy model is currently being operated.
The situation has transformed since 2004 and last select committee
report and we are delighted that the committee are looking at
this again, and in depth.
The way some of the large companies (non brewing
pub companies in the main, but not solely limited to them) have
skewed the tie has meant that the leased model, as currently operated,
is a problem in itself. All this arrangement has created is a
band of demotivated tenants. A little like the situation in some
banks, who succumbed to greed during the good times, the tenant
model has been skewed through greed and self-interest.
There are many examples of excellent, well run
pubs, doing well with great "footfall" and good turnover,
yet barely struggling to break even because the rent is punitively
high and they are charged such high prices for beer. There is
also strong evidence to show that some companies are continuing
to raise tied beer prices and rents in the recession, and in some
cases above the rate of inflation, in order to service their very
large level of debts. This is forcing many of their tenants, each
and every one a small business, out of business.
We have been contacted by licensees from up
and down and country regarding this issue, and whilst we share
concerns over high levels of beer duty, prices in supermarkets,
regulation and planning, we do think that the way "the tie"
is currently being operated by some companies is a very serious
issue and one that needs urgent reform. Without dealing with this,
the very real and very serious situation facing the British pub
will not be addressed. The current situation is not good for licensees,
pub customers, and indeed is leading directly to the closure of
pubs. It is therefore in itself a threat to the future of the
British pub and the community pub in particular (the majority
of community pubs are owned by a few companies), and needs urgent
and radical reform.
The current code of practice has been an abject
failure. It is clear where the blame lies for the skewing of the
tied system that has led to the abuse of this relationship, so
expecting these companies to regulate themselves on this issue
is unacceptable. Legislative change, including a mandatory and
enforceable code of conduct, is essential.
Many of the arguments in defence of the current
operation of the tie simply don't stack-up; they are not backed
up by evidence and in some cases are now absurd. It is extraordinary
that some companies and associations continue to suggest that
the tied model as operated is in the interests of tenants. In
far too many cases clearly the opposite is the case. Even the
argument that the tenancy model offers a "low cost entry"
into the sector is now deeply flawed. There is considerable evidence
that many tenants are being offered tenancies when they do not
have the knowledge or understanding of the very serious, binding,
and long term legal contract they are entering into, and often
have clearly not been vetted sufficiently as to whether they are
really suitable to run pubs. This is a covert form of exploitation
and leads to the unfortunately all too common cases of human misery,
indeed sometimes tragedy, which is caused when these small businesses
fail—often when people have ploughed thousands of pounds
of their own money into the failing business including mortgages
and savings. To suggest that this outcome is `low cost' to these
individuals is bitterly ironic. Although the remit of the committee
is business and enterprise, in this particular situation, the
multitude of tales of human misery, of people losing savings,
houses, simply cannot be ignored. This is not only a business
issue, or even one about the historic public house, nor even about
communities. On this level, this is a moral issue that must be
tackled by Government.
The fact that the pub companies have not been
prepared to publish figures on "churn" is very revealing.
Most changes of tenant represent the failure of a small business,
very often following an acrimonious dispute with the pub company
or brewery. This cannot be ignored. To suggest, as some companies
have done, that there are more free of tie pubs closing than tied
ones is as dishonest as it is absurd. It is also notable that
despite complaining about the very difficult trading conditions
pubs are in and problems with high beer duty and supermarket pricing,
it is the large companies themselves that are closing the vast
majority of pubs that are closing nationally—often, even
when the pub could be viable in other hands. This is a serious
threat to the future of the British pub, coming from companies
in trouble who are having to service debts and answer to shareholders.
This cannot be a defining reason for closing hundreds of pubs
and unless action is taken, it will be.
It is notable that some companies (some in particular!)
are finding it harder and harder to find people willing to take
on tenancies so are resorting to installing management companies.
There is also the concern that were property prices
higher, companies would be much more willing to cash in for alternative
use. Ironically, it could well be that the recession is saving
many pubs from permanent closure simply because sale for change
of use is currently not realistic in the current climate. This
means that this is an issue that must be resolved before the recession
ends, or we could see wholesale disposal of pubs by companies
who can make short term gain by selling them.
THE KEY
ISSUES AND
SOLUTIONS
1. The market dominance of the huge Pubcos
No-one likes regulation of markets unless it
is necessary, but the dominance of large companies and the way
some of them have skewed the tied system so hugely in favour of
the property owning company and against the small business people
actually operating the business is a source of fundamental concern.
The Save the Pub Group believes that this situation should be
looked at again.
The Beer Orders distorted the pub market the
other way round by restricting the large brewers, and in the process
establishing huge and dominant non-brewing pub owning companies.
The dominance of a few companies is not in the interests of anyone,
and worst of all, it is now causing pubs to close that should
not close and that could be viable in the hands of another operator
or indeed the local community. Indeed there is much more justification
for the use of tie by companies who brew beer than those who do
not. Smaller breweries supplying their own pubs with a range of
beer. So a reverse beer orders could even be considered, whereby
the supply tie is abolished for all stand alone pubcos but allowed
for breweries up to a limit (suggested no more than 500 pubs).
The idea as proposed by some organisations that any brewery owing
more than 500 pubs would have to allow at least one, or maybe
two beers outside of the tie, is worthily of consideration here.
It was a correct conclusion in the 1980s that
the dominance of a few companies was not good for customers. So
it is right to conclude that this is the case now, just with different
sorts of companies.
The Save the Pub Group believes that similar reform
should be considered. The `Beer Orders mark 2' or shall we say,
the `Pub Orders' to stop the dominance of a few companies and
what appears to be the 'cartelisation' of the market.
The Save the Pub Group does not say what an
appropriate maximum number of pubs to own should be. However,
we do start from the premise that if 2,000 pubs in the hands of
a single brewing company was a bad thing for pub customers and
the market, then more than 2,000 in hands of any company is bad
for the market and for pub customers. 2,000 was deemed too many
pubs for any brewer to have, at a time when there are more pubs
than there are currently (Number of pubs estimated before beer
orders 78,598 (figure from 1986), current number approx 56,000).
So 2,000 now is a notably larger share of the market than it was
when the Beer Orders were introduced.
The distinction between brewing and non brewing
companies is arbitrary and whilst the original intention behind
the beer orders was to give more choice to consumers it completely
failed to predict the slewing effect of huge non brewing pub companies.
It is time to address that.
So "Pub Orders" could restrict the
number of pubs that can be owned by any one company and with strict
and detailed clauses that prevent company linkage, unfair supply
linkages/agreements. It should also be devised to ensure and generate
access to smaller local beer producers and prevent the dominance
of the market by larger brewers.
We want to stress that this in itself would
NOT deal with the tie as operated and abused by some companies,
so other measures would also have to be introduced. One unfair
tenant agreement is not acceptable. But this move would offer
more choice to licensees of companies with whom to take tenancies,
and would prevent the domination of the sector which is not good
for customers, tenants or most brewers. It is crucial, however,
that if ANY tied pub must be operated, then there needs to be
major reform to the tie, if it is to remain for any number of
pubs and for any length of time.
The Save the Pub Group also believes that regional
and local restrictions should be considered so that a few companies
cannot dominate all the pubs in a particular region or town/village.
It is not healthy where two or three companies own all the pubs
in one area, this is not real competition. So it is suggested
that consideration of the Pub Orders should include this.
We do also, however, share concerns that a change
in ownership could lead to disposal of pubs by companies seeking
to cash in on their value rather than sell to another operator.
With the current scandalously weak position of pubs in planning
law, treated simply as any other business except in certain extreme
cases, this is a concern. This is why it is so essential that
planning law is reformed to "enshrine" the public house
in planning law, giving communities a right of statuary consultation
whenever a pub is closed and including a mandatory viability test.
It is also important to introduce the right to buy for sitting
tenants and communities (see below).
2. The supply tie
Perhaps the biggest concern, and certainly the
biggest cause of disquiet amongst licensees is "the wet rent"
ie the inflated prices that tied tenants have to pay for their
beer.
The tied tenancy mode is supposed to be a relation
of business partnership. It is no longer so in too many cases.
In a genuine business partnership, the costs of product would
be devised to enable the smaller business to succeed. The Save
the Pub Group is very concerned to see the way some companies
have increased the prices to tenants, including in many cases
at rates above the rate of inflation.
Despite securing huge discounts from brewers
(often discounts that are on the verge of making the brewing of
beer unviable), these are not passed on to the tenants. It is
very notable that Wetherspoons, who also have considerable buying
power, have chosen to pass on the discount they gain from brewers
(it is also notable that Wetherspoons do have a real commitment
to genuinely local, microbreweries who find it very difficult
to get into many pubcos pubs). This means the way the tie is operated
is not good for pub customers who find they have to pay notably
more for beer (which of course makes these pubs less attractive
to customers and this reduces business, threatening these pubs
viability). So the tie as operated by the big pubcos is one of
the most serious threats to pubs.
However, even when operated by brewers large
or small, the tie has to be fair, and be a genuine and realistic
business relationship. So we wish to ask is it really fair or
right for any company to charge considerably higher prices for
their own beer than they sell it to the free house next door?
This seems a very odd business model and can only possibly be
justified if balanced by notably lower rents and real business
support.
The supply tied system can only be justified
if the rent is genuinely and demonstrably lower to balance this.
The conclusion of this, however, is surely therefore that two
agreements should really sit side by side, one rent only, one
reduced rent and supply tie on beer. Without having this comparison,
we only have tie pub owner/property landlord's word for it that
the rent is lower than it would otherwise be. There must therefore
be a strong argument for making these two models optional and
a decision for the tenant. That way either would have to be fair
and transparent. If the tie is as much in the interests of tenants
as the big companies like to suggest, then they surely have nothing
to fear from offering a different business relationship, as if
the tied system is so good, nearly all tenants would sign up to
it!
This is particularly true when you consider
that the owner also has the option of operating the pub as a managed
pub. If an owner does not believe a pub can succeed as a managed
pub then does this mean that the pub actually is not viable under
the tenanted modal they operate and if so is it right to offer
a tenancy?
There could also be system whereby a supply
tie agreement is subject to an option for either party to break
the agreement after three years, subject to giving six months
notice in writing. This would prevent people being tied into a
business relationship that is not viable and can only lead to
business and personal failure, which is too often the case with
longer term leases.
In the short term, and because reform is so
urgent, the committee/Government should consider a policy which
allows one or two beers to be bought out of tie. This in itself
likely to have some effect on high prices, if some albeit very
limited competition encourage licensee to try to sell as much
of that beer as possible unless price of others also reduced.
One of the arguments in defence of the tie include
not wanting to damage smaller, regional breweries, a point that
we take seriously. However, we are concerned that we have seen
no examples of how companies, smaller brewers or otherwise, are
operating "the tie" in a fairer way that allows their
tenants to make a living as well as selling their beer.
We also believe that action should be taken,
as quickly as possible, to regulate the price that pub companies
can charge lessees for tied products. Presumably this would be
as a result of action by the OFT.
We also believe there is clear and pressing
need to regulate the outrageous system of fines operated by some
companies. The system of self-imposed fines as operated by the
big pubcos (£1,300 for every charge of buying out, even when
the pubco were not able to supply beer needed by the pub, plus
£300 legal fees) without any right to an independent appeal,
is a disgrace and must be challenged. It is questionable whether
this is actually legal in British and European law. It certainly
shouldn't be.
There is also clear evidence of examples of
where the Brulines system is not accurate. This means that people
who have never bought out of tie have been fined and have no right
to challenge this. This is appalling.
3. Rent
The current rent calculation takes no account
of the revenue lost to lessees as a result of being unable to
buy beer in the free market. This is wrong and should be changed.
Whilst upward only rent increases may have gone
(one of the few recommendations from the 2004 report) they have
been replaced by annual RPI rent increase regardless of trading
conditions experienced by lessees. These are similarly unfair
and should be ended.
There is real concern about the level of rent
and whether they actually allow the tenant (the small business
person/people) to make a living (as shown clearly in the Morgan
Stanley report). The Save the Pub group supports the idea that
all tenancies should ensure that rents are charged at a level
to ensure that tenants can earn a wage not less than the National
Minimum Wage, including any adjustments for living in and holiday
pay. This would prevent some of the rent levels that are unsustainable
preventing people from making a living. If any pub could not work
under this model, it could be offered to a different operator
(with first right to buy offered, at a fair price, to the sitting
tenant—see below).
There are also real concerns about the fairness
of assessment of rent. Some form of national system should be
established to allow for the assessment of the fairness of rents
charged to individual tenants.
Tenants currently have little or no right to
challenge rent levels apart from paying themselves. This is exploitative.
All tenants should have access to independent arbitration, which
should be a legal right within the terms of the tenancy. The costs
of arbitration should be included as a cost against profits for
rent purposes.
Concern has been expressed about the independence
of the RICS Trade Related Valuation Group because it includes
representatives of pubcos and valuers who represent pubcos but
no representatives of tenants. A truly independent panel should
be commissioned to review this issue.
There needs to be an overhaul of the current
system to create a mandatory code of practice that creates transparency,
a register of rental values and an agreed form of profits based
valuation that takes account of the real costs of the tenant.
We are concerned that some tenants are forced
through the terms of their lease to sign up for other things such
as insurance through the pub owning company. This is an abuse
of the business partnership. The small business operators should
have the right, as other small businesses do, to shop around and
make such decisions for themselves.
4. Problem with access to market for smaller
(inc. more local) breweries which restricts customer choice
The current dominance of a few pubcos creates
significant barriers to entry for smaller brewers. This is not
good for these businesses or for customer choice. Brewers can
only supply their products to pubco tenants if they are on the
pubco lists, and pubcos require that brewers offer them substantial
discounts. In many cases smaller brewers are almost completely
excluded from their own local markets. So often a local brewer
can't get into local pubs because they are all pubco/tied houses.
This is a difficult problem to address, however
having more pubs in the hands of more and smaller operators and
including a higher proportion of free houses should assist this.
The latter would happen if tenants and communities were given
a genuine right to buy when pubs are sold. It would also be assisted
by regional/local application of the "pub orders" which
would prevent domination by a few companies in any one market/area/town.
5. Restrictive covenants
A particularly deplorable practice is the use
of restrictive covenants to prevent future purchasers from continuing
to use the premises as a pub. The company concerned often takes
an entirely self interested decision to permanently shut pubs
against the wishes of the community served by the pub simply to
serve their own commercial interests. The ease with which pub
companies are able to dispose of struggling pubs, usually for
alternative development, reduces the financial incentive they
have to work with a lessee to turn around a pub in difficulty.
The result of this is to restrict competition
and to strengthen the market dominance of an individual company
in a locality. The use of restrictive covenants should be outlawed
and as quickly as possible.
6. Automatic right to buy for lessees and
for communities
At the moment it is possible for a pub to be
sold without the knowledge of the existing lessee. This is scandalous
and shows how few rights the small business has in the relationship
with large companies.
Existing lessees should be given the right to
buy the freehold of their pub. The easiest way to do this would
be to introduce legislation to prevent a pubco or brewer selling
a pub without first offering it to the sitting lessees at the
market rate. The Land Reform (Scotland) Act 2003, which includes
a community right to buy, provides a precedent which could be
copied.
Communities should also be given the right to
buy their local pub. Where a community group wishes to buy a pub
they should be able to apply to the Minister to appoint an independent
valuer to assess fair market value.
7. Other recommendations
The AWP tie should be abolished. It should be
removed by legislation or a mandatory code of practise.
CONCLUSION
The only people who don't want any reform to
a system that is not working—not for pub customers, tenants
or smaller breweries—are those who have a vested interest
in maintaining the status quo.
Luckily the debate has moved on considerably
and the arguments against any reform have been shown to be misleading
and flawed.
Reform is essential and for the sake of the
future of the British pub, it needs to come as soon as possible.
25 March 2009
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