Pub Companies - Business and Enterprise Committee Contents


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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