Pub companies: follow-up - Business, Innovation and Skills Committee Contents

Memorandum submitted by The British Beer and Pub Association (BBPA)

The Trade Association Representing the Interests of Owners and Operators of Over 32,000 Public Houses Throughout the UK


  1.  The Business and Enterprise Committee Report was highly critical of the tied pub business model and there has since been recognition by BBPA members operating tenanted and leased pubs of the need to accelerate change. Significant progress has already been achieved towards this objective which we regard as a continuing process and we are not in any way complacent about the work and changes required.

  2.  In addition during extremely challenging trading conditions, pub companies are providing significant support (around £4 million every month) to their retailers on an on-going basis in many different ways, through rent reductions, absorption of price increases, discounts and business support.


  3.  Following the Report BBPA immediately set up a working group to develop a mandate for change. A series of industry commitments was later endorsed by the BBPA Council which was communicated to Lord Mandelson in July 2009.

  4.  Late in the Summer BBPA took part in a "mediation" process with licensee representative bodies and other groups to try to seek resolution on the issues raised in the BEC report. This process was largely funded by BBPA at a cost to the Association of £142,000. (In advance of the mediation sessions BBPA also attended three consultation meetings with the other parties involved, facilitated by the BII, during which there was open debate on all the issues raised in the BEC report.)

  5.  The wide disparity of interests held by various other parties involved in the mediation process meant that total agreement could not be reached. A number of these parties called for the BBPA to arrange collective agreements with its members on matters that would clearly contravene competition law. Others were looking for an end to the Tie which is a view the BBPA does not support.

  6.  It was possible, however, to achieve a binding agreement of commitments with two of the most respected organisations representing 9,000 individual licensees, namely the British Institute of Innkeeping (BII) and the Federation of Licensed Victuallers Associations (FLVA).


  7.  The BBPA (in conjunction with the BII and FLVA) is developing a new industry Code of Practice that will bring real tangible benefits to both those entering into new agreements and existing licensees (a final draft will be made available to Committee members in advance of the oral evidence session on 8 December). The revised Code will implement all of the measures contained within the Agreement referred to above which includes improved transparency, better and more complete information, better protection for prospective tied pub operators and a more open rent review process with inexpensive and accessible re-dress in case of dispute.

    — Compliance with the new industry Code will be a mandatory requirement for members of the BBPA and all members will be required to seek accreditation of their Codes with the BII.

  8.  All BBPA members' codes will bear the BBPA and BII logos to indicate compliance with the industry code of practice and the BII's own standards for compliance. The purpose of the dual-badge is to indicate to prospective tenants and lessees that a pub company code displaying both these logos operates in accordance with industry standards of fairness and transparency.

    — A full copy of the industry code and relevant pub company code will be supplied to all prospective tenants and lessees

    — Revised company codes will be signed by the tenant/lessee and the pub company and thereby will become binding and may be used as evidence in any disputes or subsequent court proceedings. Existing tenants and lessees will be offered the opportunity to sign up to new Codes but this will be at their own discretion.

    — The Code will be binding on successors since they form part of the basis on which the original agreements were entered into.

  9.  In the event that a BBPA member does not follow the Code its accreditation with the BII will be removed and they will not be allowed to display the BBPA logo on their Codes. Ultimately any such company could not remain a member of the BBPA.

  10.  The Industry Code can only be changed with agreement by all the signatories to the agreement namely the BBPA, BII and the FLVA (and any other parties that might apply to be part of that agreement). Companies will always be able to change their own Codes but cannot diminish them by removing any of the obligations contained in the industry Code. Where a company wants to offer enhancements to those conditions it is free to offer those. By definition additions through Company Codes can only be improvements since they must meet the standards laid down by the joint industry Code.


  11.  The PIRRS scheme has been piloted and will be available soon The scheme offers a transparent, independent, low cost rent review resolution service as an alternative to arbitration. The PIRRS scheme will be funded by BBPA members but with fees payable in equal proportions by both parties to the dispute. The scheme is available to the tenants/lessees of pub companies who are members of the scheme. All BBPA members will be members of PIRRS and non-BBPA members may join the scheme on payment of a £5 levy per premise.

  12.  The scheme is governed by a management board (comprising representation from the Association of Licensed Multiple Retailers (ALMR), BII, BBPA, FLVA and the Guild of Master Victuallers (GMV)) and is administered by the BII. The list of valuers involved in the PIRRS scheme is approved by the management board. The choice of valuer is at the discretion of the tenant/lessee and the company has no power to intervene.


  13.  We set out below how we consider the revised industry Code will address aspects of the BEC Report:

Rent Setting/Transparency/Trading History:

  14.  The new Code requires companies to demonstrate far greater transparency with regard to prices charged for beer, eligibility for discounts and whether they will allow guest beers supplied outside the tie.

  15.  Companies must set out clearly their policies in respect of rent setting and review including full transparency in regard to how the Fair Maintainable Trade (FMT) has been calculated with a breakdown of costs and detailed information on the assumptions made on turnover. The BBPA Code also incorporates a checklist of information that may be requested by the tenant or lessee from the pub company where it has not already been supplied.

  16.  Shadow profit and loss accounts (P&L's) must be provided with sufficient detail to enable tenants and lessees to take proper professional advice.

  17.  Companies must also draw attention to the availability of ALMR and other benchmarking reports. (We also understand that RICS has offered to develop a database that would gather all such information available.)

Fair Share of Profits:

  18.  RICS has undertaken to review and revise its guidelines on valuation. The principle put forward by other parties that "a tied tenant should be no worse off financially than a free of tie tenant" does not mean that there is financial neutrality between the two models given the nature of the business relationship, the support and difference in business risks. We are happy to be guided by RICS on this and will await their judgment, to which we will adhere. The BBPA considers the independence of RICS in this process to be vital.


  19.  It is not part of the pub companies role to disclose commercial information and such information will be equally sensitive to the lessee/tenant as it is to the pub company. Rent should always be a matter of negotiation between two parties and a prospective tenant/lessee has the right to walk away from the negotiation. The "market" will prevail and during the current economic climate, the market is enabling new tenants/lessees to negotiate extremely favourable terms.

  20.  In future an existing tenant subject to a rent review may, of course use the PIRRS scheme to resolve any disputes.


  21.  The Code makes it very clear that any goodwill attached to the premises attributable to the tenant or lessee having achieved a greater level of business than an "average competent tenant", and the effects of the tenant or lessee's improvements, must be disregarded on rent review.

RPI Increases:

  22.  Individual companies must be free to decide whether or not to include RPI increases within their agreements. However, companies must advise tenants or lessees, where their agreement refers to indexation by reference to RPI, that the adjustment in the rent may be upwards or downwards.

Upwards Only Rent Reviews:

  23.  Upward only reviews have been excluded from new leases ever since the 2005 revision of the Code. Companies also undertook not to implement such clauses and to provide comfort letters to that effect if requested and to amend leases by deed of variation (at lessees expense).

  24.  This pledge is continued through to the latest revision and will include such phraseology as to make it clear that reviews can result in reductions as well as increases.

Beer Prices and Wet Rent:

  25.  Competition law prevents BBPA members from holding any discussions regarding relative prices. The BBPA considers the overriding consideration to be the potential profitability of individual tenants/lessees. Therefore, companies must provide total transparency to prospective tenants/lessees about all aspects of the contract they are about to enter.

Enforcing the Tie:

  26.  Companies seeking to enforce the tie by the use of flow monitoring equipment (eg Brulines) must include within their Codes a protocol on the use of such equipment, including any prima facie evidence available. The protocol must follow the minimum standards described in the industry Code.

Amusements with Prizes (AWP's) income:

  27.  BBPA cannot make any industry commitment to remove AWP ties as this would restrict its members ability to compete in a free market.

  28.  Recent evidence (we understand that this will be submitted under separate cover by a member company) suggests that in circumstances where the tie has been removed, the absence of company support, old machines and the inability of licensees to manage machines effectively has led to a significant drop in machine income in only a short space of time. Individual companies will respond to requests for removal of the tie on machines at their own discretion.

  29.  However, machine deals are changing constantly and will be introduced over time not necessarily waiting on the rent cycle, providing of course that the tenant consents.

  30.  The revised Code also stipulates that in future machine income must not be included in the "divisible balance". This will apply to new agreements and to existing agreements on review. We do not exclude earlier introduction but that is up to individual companies and tenants.


  31.  Insurance schedules are often not provided because policies are not tailored to individual pubs. A block policy is usually negotiated by pub companies and premiums are allocated according to risk and size of pub.

  32.  In future companies must supply lessees with full details about insurance cover, ie provide copies of the policy and any excess payable and price-match where lessees are able to find a cheaper like-for-like policy.

  33.  It has been suggested that tenants/lessees should be able to insure the property themselves. However, experience shows that many pubs would be left exposed through delay or the absence of any insurance being obtained. The risk to the company is too great to resolve in this fashion.

  34.  We appreciate that some insurance companies may be unwilling to quote if they suspect that they are just being used to price-match. There is no easy solution to this one except to say that pub companies obtain very competitive quotes and this process ensures that companies pass on that benefit to their tenants through the transparency that is being given.

BDM's and support services

  35.  BDM quality varies as it will in any job or profession and tenants/lessees are entitled to pass any complaint about service levels to those higher up in the company.

  36.  Company codes must set out provisions and commitments governing the competence and future progression of BRM's/BDM's together with the procedure for complaints and a mechanism to resolve disputes. The BBPA has agreed to work with the BII to develop professional qualification standards that companies can offer as appropriate.

  37.  Codes should also set out the role of BRM/BDM's and the support and professional services they are expected to provide.

Dispute Resolution:

  38.  The BEC Report considered that a mechanism should exist to deal with disputes between individual companies and their tenants/lessees.

  39.  As part of its accreditation scheme the BII will assess whether companies have adopted all the requirements of the industry Code within their own individual codes of practice. Companies must comply with all the requirements of the industry Code to receive accreditation. BII also looks at other issues such as clarity and content beyond the Code.

  40.  Company Codes will explain the procedures to be adopted where either party feels the provisions of the Code have not been followed. Company Codes will also set out how any complaints will be properly considered at an appropriately high level of management in the company, and at a level of management higher than that at which the relevant decisions were initially taken.

  41.  With effect from 2010, under the new Code, companies will be accredited on an annual basis and any transgressions from the Code will be publicised by the BII.

Tenants/Lessees Responsibilities

  42.  There has been criticism that incoming tenants and lessees have been ill-prepared to enter the licensed trade. To ensure prospective future tenants and lessees are better prepared and protected, it will be a mandatory requirement for anyone wishing to enter the trade to undertake a course (currently being devised by the BII) to ensure they are fully conversant with the tied pub model, contracts etc. Pub Companies will not let anyone sign a lease or tenancy agreement until they have fulfilled this obligation.

  43.  It will also be mandatory for companies to insist that, prior to accepting a tenancy/lease, the tenant/lessee takes independent professional legal and business advice and prepares a business plan which should be based on that advice.

  (The above requirements may be waived where the tenant/lessee can demonstrate to the satisfaction of the pub company that they have relevant prior experience).

  Prospective tenants/lessees must also hold a personal licence.


Financial Assistance:

  44.  Reasons for business failure are many and varied, some of which are inevitably due to market conditions and individual circumstantial changes but others, sadly, are down to the inability of individual tenants/lessees to sustain and maintain a good business. Where this is the case companies will usually use their best endeavours to work with the tenant to improve the business and if this fails, to assist the licensee to exit their agreement as sympathetically as possible.

  45.  However, further flexibility is provided by direct financial support through permanent, or temporary rent reductions, reduced prices, reduction in other charges and further operational support.

Pubco Model:

  46.  The pub company business model has been much criticised but the support given by pub companies to struggling tenants and lessees has ensured that many pub businesses have survived. No other sector has provided this level of back-up.

  47.  The sudden downturn in both the economy and consumer spending has shaken many business models and brought many sectors under acute pressure. The partnership arrangement of the tied model means that a pub company has no incentive for a pub business to fail and companies have worked very hard with their tenants and lessees to safeguard their long-term mutual interests.

The Tie

  48.  Companies are competing hard for the best tenants which is why there is no single industry standard tie. The many pub-owning companies in the sector operate different versions of a tied agreement, including those micro-brewers that own pubs. Some of the larger companies, in particular, have a number of different models operating in parallel. In addition, many of these general contractual agreements are then tailored to the specific agreement on a specific pub. This flexibility is necessary because no two pubs or individual tenants are alike. Each final contractual agreement for the tenancy of a particular pub will be unique to that particular pub and tenant.

  49.  Such variety and flexibility provides a unique opportunity for those with entrepreneurial skills to operate highly successful businesses.

Restrictive Covenants

  50.  Covenants have historically been applied to protect the business interests of other lessees operating in the area where there is persistent overcapacity. The use of such covenants is not restricted or limited to the pub trade and is common in other industries. Restrictive Covenants cannot be removed from this mechanism since tied pubs account for only 60% of the market. Managed houses and free houses would still be free to apply Restrictive Covenants.

  51.  The OFT recently investigated the subject of Restrictive Covenants in responding to the CAMRA super-complaint. The OFT found that the use of Restrictive Covenants is not widespread in the pub sector but intends to keep the issue under review should such practice become persistent and widespread.

  52.  Competition law prevents BBPA from seeking a collective agreement from its members on this issue but the Code requires all companies to make their policies clear on the use of Restrictive Covenants.


  53.  The process of assignment results in changes to the economic model as far as the incoming lessee is concerned since the price of entry and therefore the level of investment will generally have increased as a result of the premiums paid. The assignee has to service the debt resulting from the premium whilst continuing to operate the business under the terms of the lease that has been purchased. The landlord plays little or no part in this transaction and derives no financial benefit from it.

  54.  Given the downturn in the economy, the value of these leases has diminished significantly, in line with the decline in the property market. Therefore leaseholders have seen their asset values decline and this has been particularly acute for those who bought their leases in 2006  7 and who probably now find themselves in "negative equity". The locking of the market also means they have no ready exit.

  55.  We have undertaken a brief survey of members which revealed that 34% of current leases have been acquired through assignment.

  56.  We have become increasingly concerned to ensure that assignees are given the same information as the original leaseholder. In order to protect incoming lessees the Code places new obligations on both the pub company and the lessee wishing to assign the lease (assignor) to ensure that the purchaser of the lease (assignee) is supplied with the same information as that provided by the original landlord at the commencement of the lease. The assignor must also insist that the assignee has fulfilled the same requirements made of a prospective tenant/lessee by a pub company (ie hold a personal licence, prepare a business plan, attend a pre-entry course and take professional advice).


  57.  BBPA recognises RICS as the independent expert body and, following the recent RICS review of rent setting methodology, will abide by any revised guidelines on rent setting that emerge.


  58.  For many years the BBPA and its members have worked successfully in co-operation with a variety of industry bodies and will continue to do so wherever possible. However, the wide ranging and fixed positions held by members of the IPC makes it difficult to reach further agreement on issues that would damage the economic success of our members and, in our view, the businesses of many tenants and lessees. As stated previously, the BBPA is unable to engage in discussions that would breach competition law, by restricting the ability of our members to compete in the market place, or that seek to remove the Tie.

  59.  BBPA will continue to work hard on behalf of all the industry to minimise the effects of legislation on the pub sector. All pub operators, whether free houses, tenanted/leased or managed, benefit from the BBPA's activity which recently has included campaigning on taxation, an increase in stakes and prizes, a lengthy and costly legal case defending pubs against excessive charges by PPL and judicial reviews of licensing authorities on occasions where they have exceeded their legal powers.


  60.  Pub Companies have demonstrated an unprecedented commitment to implement change quickly with prospective tenants/lessees being better protected and informed under the Code. Existing tenants will also benefit considerably from the provisions of the new Code and especially from the introduction of the PIRRS scheme.

  61.  We do not believe that a referral of the Tie to the Competition Commission is either necessary or helpful at this stage. Any referral would leave the industry in a state of turmoil and limbo for several years with vital investment drying up until certainty returned to the sector. The industry cannot afford to be left behind at a time when the rest of the hospitality sector is recovering from the recession and gearing up for the 2012 Olympics.

  62.  Changes continue to be made to the tied pub business model with greater competition between pub companies seeking to recruit the best tenants and lessees.

  63.  Any further intervention in the industry would mean irrecoverable damage and unintended consequences as those that resulted from the MMC Inquiry back in 1989.

  64.  We should be happy to keep the Committee informed about progress with the implementation of the above and the significant changes that will be brought into place. The Code will be reviewed in June 2010 and reviewed on a regular basis thereafter with the full participation of the organisations involved. We recognise the need to change, but hope that the Committee will recognise the significant progress made so far.

18 November 2009

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