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
INTRODUCTION
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.
ADDRESSING THE
BEC REPORT
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).
REVISED PUB
INDUSTRY CODE
OF PRACTICE
(INCORPORATING BBPA, FLVA AND
BII AGREEMENT)
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.
PUB INDEPENDENT
RENT REVIEW
SERVICE (PIRRS)
11. The PIRRS scheme has been piloted and
will be available soon www.pirrscheme.com. 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.
SPECIFIC ISSUES
RAISED IN
THE BEC REPORT
AND HOW
THESE ARE
DEALT WITH
IN THE
CODE
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.
Comparables:
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.
Goodwill:
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.
Insurance
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.
FURTHER ISSUES
RAISED IN
THE BEC REPORT
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.
Assignments
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).
RICS PUB INDUSTRY
FORUM REPORT
AND RECOMMENDATIONS
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.
FORMATION OF
THE INDEPENDENT
PUB CONFEDERATION
(IPC)
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.
CONCLUSION:
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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