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


Supplementary memorandum submitted by BBPA

BIS COMMITTEE: 8 DECEMBER 2009 FOLLOW-UP INFORMATION

  Further to Brigid Simmonds' letter to Peter Luff dated 14 December 2009, we are now able to respond to the further questions raised by the BIS Committee:

  Q85  Attached is clarification of the legal consequences of the UK pub industry framework code of practice and individual pub company codes of practice for tied tenanted and leased pubs. As indicated in the attached letter the industry Code of Practice is binding on all members of the BBPA who will undertake to incorporate the pub industry Code into their own codes of practice. These codes will be signed by the tenant/lessee and the company and, as such, will place obligations on both parties. This will constitute a legal contract between the parties, again enforceable in the way that such arrangements are usually enforceable by the courts.

  Q90  Comfort letters will not now be necessary since, as DLA Piper point out, company codes will state categorically that any upward only enforcement clauses remaining in leases will not be enforced. (UORR clauses have been excluded from new leases by BBPA members since the last revision of the Code in 2005 and as such this is a diminishing problem. Obviously new leases or tenancy agreements do not contain UORR clauses.)

  Q130  The Annex referred to can be found on page 16 of the provisional industry Code supplied to the Committee. This sets out the suggested detail for inclusion in a protocol which each pub company is required to prepare. This is not a prescriptive list and companies may choose to list additional evidence that might be used.

  Q131  Payment by direct debit is now common practice within the industry as a way of completing business transactions. Any monies due to companies on receipt of invoices are processed in this way. We are assured by our members that direct debits are not applied where transgressions against buying-out are concerned without the consent of the tenant or lessee concerned.

  Where such permission is not obtained companies have to resort to legal proceedings in order to gain recompense. The company "fine" allows the company and the transgressor to resolve the issue without recourse to the courts but only with the agreement of the transgressor.

  Q139 and Q143  The Pub Independent Rent Review Scheme (PIRRS) is an integral part of the pub industry Code. All BBPA members are bound to honour the commitment to offer PIRRS, as an alternative to the contractual obligation contained in tenancy/lease agreements, to arbitration in the event of an unresolved dispute on the level of rent following a rent review. The scheme operates by application by the tenant/lessee to PIRRS for adjudication of the rent by an independent expert which cannot be refused by the company, as a signatory to the Code, and a member thereby of the scheme.

  In order to proceed to the independent valuation both parties sign a waiver of their right to refer the dispute to arbitration and agree to abide by the decision of the independent expert. This is effected by signing the PIRRS Deed of Variation. This is binding on both parties and there is no appeal.

  The independent expert then takes written evidence from both parties which is limited to six sides of A4. It is important to note that copies of any code of practice binding on the landlord are to be submitted to the independent valuer. The company code of practice that derives from the pub industry Code must obviously be included in the submission made by the landlord.

  The choice of the independent expert is made by the tenant or lessee from the PIRRS panel of independent valuers and that choice cannot be challenged by the pub company.

  We would like to emphasise that while commitment to PIRRS is now part of the pub industry Code, BBPA members are already committed to a scheme by virtue of their membership of the BBPA, one of the conditions of which is that they are members of PIRRS (which is funded by them through the BBPA). As such PIRRS also stands alone as a service to the industry.

  Q147  Mr Darby has provided the following clarification of his trial of AWP machines not being tied:

    "In the Tracker agreement pubs we have maintained the AWP tie in order to give the tenant access to our high quality machine suppliers but also to allow us to continue to see the actual performance of the machines. However, with the tenant taking 100% of the income from AWPs after tax and machine supplier rent we have stood back and allowed the tenant to manage the day to day relations with the machine supplying company. Our experience is that AWP income rapidly diminishes because the tenant seeks to reduce the rent on the machines in his pub by selecting lower quality machines or opting for lesser levels of service from the machine supplier. The tenant hopes to maximize revenue but actually ends up pretty quickly disappointing players because the machines on offer are poor or not working. As a result AWP income quickly falls. The big difference is that we as the pub company are not actively managing the performance of the machines like we are in the rest of our tied machine estate but allowing the individual tenant to do it. The test has proven that a sole operator, unless gifted with specific machine expertise (which is rare), will under-perform a professionally organised group gaming machine operation. Our point is that the combination of a committed pub company with a fairer sharing of gaming machine income will result in greater value for the tenant/lessee than a freeing of the machine tie."

  Q150  The financial difference to the lessee of the AWP income not being included in the divisible balance will vary on a pub by pub basis.

  Assuming a hypothetical machine income of £5,000/year (split 50:50 between the tenant and the company) after rent (to the machine operator) and duty (to the Government). Under the current system £2,500 of that is taken into the P&L account and therefore forms part of the divisible balance on which the rent is arrived at. By removing the tenants' share from the shadow P&L the divisible balance is reduced by the same amount and is retained by the tenant.

  By way of illustration and assuming a 50:50 split to the divisible balance between rent and retained profit this shows a net benefit to the tenant of £1,250.


Before
£
After
£


Income150,000150,000
AWP income2,500
Costs100,000100,000
Divisible balance52,500 50,000
Rent @ 50% divisible balance26,250 25,000
Net profit26,25025,000
2,500
Retained profit 26,250 27,500



FURTHER INFORMATION RE COURT CASE REFERRED TO BY MR HARRISON

  We had no knowledge of this case at the time of the oral hearing but our understanding is that this was a statement made by a lawyer without instruction from the company concerned who would not have wished to see their Code put in this light since whilst it may not be legally binding under the current circumstances, the company would certainly have regarded it as an obligation. However, this situation will not apply to company codes complied in the future compiled as they will be under the new pub industry Code and as such binding on both parties.

  With regard to company codes of practice in general and court cases — there have been some complaints but not many. Generally codes have been complied with and there has not been a court case arising from such circumstances. However the legal status of these codes now changes with the nature of the obligations placed on both parties as stated above. Signatures by both the pub company and the tenant/lessee will make company codes binding. As such we would expect a much higher level of compliance in order to avoid litigation with the codes being produced in evidence. This is a major benefit of the construction of the Code we have now entered into in partnership with the BII and FLVA.

8 January 2010






 
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