Supplementary memorandum submitted by
the IPC
The BBPA/BII/FLVA Framework Document on the
issuing of leases, published on the same day as the IPC's Executive
met, and its contents and implications were amongst the subjects
debated.
The Framework Document differs little from the
Heads of Terms reached by BBPA, BII and FLVA in September 2009.
We are at a loss to understand why it has therefore taken so long
to publish and, more importantly why it was not available ahead
of the Committee's evidence session in December. This appears
to be simply a delaying tactic rather than an attempt to address
the Committee's genuine concerns.
In commenting on the Framework Document, it
must be noted that this is essentially an internal document between
BBPA and its members, setting out the obligations the trade body
expects them to meet. The audience is therefore landlord not lessee
and the drafting reflects this. It is therefore unsurprising that
the Framework does not address the specific needs and concerns
of lessees.
As mentioned in our previous written and oral
evidence, we are concerned that undue weight will be given to
this document. The revised Framework is a codification and formalisation
of existing good practice. Whilst this is a step in the right
direction—making it more transparent and clear what the
landlord expects of the prospective lessee, the obligations it
is imposing and the money it is making from the business—
it does not deliver anything particularly new or substantive.
Crucially, it leaves the fundamental nature of the commercial
relationship between landlord and lessee—which is at the
heart of the Committee's deliberations—untouched.
The Document is, therefore, a small part of
the overall picture. All matters of concern relating to the exclusive
purchase obligations and their operation, comprehensive dispute
resolution and the competition/legal framework and the associated
Committee recommendations relating to them are outside of the
scope of the Framework and remain extant. Indeed, over three-quarters
of the Committee's original recommendations are left completely
untouched as a result of this and the RICS activity.
The IPC does not wish to comment further at
this time on the actual detailed content of the Framework Document.
As previously noted, this is an internal document for BBPA members
and the important documents from a lessee perspective are the
company Codes of Practice which will flow from this and implement
it. It is very much to be hoped that these documents will go further
than the Framework and will start to address the substantive issues
of concern to lessees, in particular the nature of the tie and
the fair share of the economic benefit deriving from it.
In commenting on the Framework Document we wish
only to draw the Committee's attention to its limitations in and
of itself and to pick up on those issues which were of concern
to the IPC at the time we gave oral evidence to the Committee
and which we hoped would be addressed by the Framework. That hope
has not been realised on any of the substantive issues:
— Enforceability: the Framework
Document places an obligation only on the landlord members of
the BBPA but it provides no details on how it is to be made enforceable
on them. We understand that it will become a condition of membership
of the BBPA for companies to have a Code in place which meets
the minimum requirements of the Framework Document; it is not
clear whether it is also a requirement to have a code in place
which is accredited by BII. The document is silent, however, on
what will happen if a company fails to meet those requirements
in their entirety or in part. For example, what is the sanction
if you do not have a Code in place and when and how will this
be assessed? What will happen if a Code fails to reach accreditation
standard? Does a company have an opportunity to rectify the situation
or are they expelled from membership? What is the procedure for
dealing with recalcitrant landlord representatives? We believe
that the mechanism for enforcing this voluntary set of standards
should be made clear to avoid any potential backsliding. Equally,
as has already been noted, this Framework will not apply to non-BBPA
members.
— Timetable: there is no clear
timetable for implementation at an individual company level. The
Framework sets an indicative timetable for companies to develop
their own codes of practice and have them accredited but this
is not set in stone and extensions are already being talked about
for smaller companies including the regional brewers. Crucially,
no timeline is set for the individual company Codes to be in place
and in force, nor is it made clear how and when the Codes will
be applied to existing leases.
— Legally Binding: the BBPA
Framework Document states that the Company Code of Practice will
become binding simply because it is signed by both parties. This
is a deceptively simple assertion and we remain unconvinced that
this is the case. At present, pub company representatives can
and do argue in court that there is no legal obligation on them
to abide by a code of practice. The Framework Document will not
change that. The Codes could only be legally binding if there
was a legal obligation to produce a Code and abide by its provisions
ie a mandatory code or if the Framework Document was translated
into the clauses of the lease itself.
We assume that the Company Code will be provided
to the prospective lessee as part of the due diligence process
before a lease negotiation is concluded. Unless the lease makes
explicit reference to the company's Code of Practice or the Framework
Document, we are at a loss to understand how it can be truly legally
binding. At best it is an agreement to agree.
Our understanding of the provisions mean that
the Code or Framework could only be relied upon in Court if a
breach of the agreement or a failure to abide by the Code could
be shown to result in detriment to the lease. This in itself is
an inherent weakness of the self-regulatory regime: it relies
upon an individual lessee taking direct action to enforce their
rights. A company could be persistently in breach of the Code
or continuing to act in an unfair manner, but unless or until
an action is taken against them in court, there is no restraint
on their behaviour.
The situation is more complicated in respect
of existing leases where the lease agreement pre-exists the Code.
In such circumstances, unless the lease is varied by a deed, the
lease would be considered to have primacy and its provisions would
be upheld in a Court regardless of what was said in a Company
Code.
What is arguably more pertinent to a discussion
on the binding nature of the Code or Framework is what would happen
if a potential or, more likely, the existing lessee refused to
sign it. The Framework requires Codes of Practice to impose significant
additional obligations on lessees. Many of these are sensible
and will do much to raise the barrier to entry and prevent problems
arising in the first place. There is a risk, however, that signing
a Code based on the Framework Document could undermine a tenant/lessee's
existing legal rights and remedies. It is likely that many professional
advisers would advise clients not to sign such an agreement. We
are unclear about what rules would apply to such lessees; would
they be afforded a lesser degree of transparency or disclosure
as a result? Also, if the lessee refuses to sign the company's
Code will the pubco still honour its part or will there be different
behaviour by the landlord in this relationship?
— Sanctions: the Framework Document
is silent as to what penalties or sanctions may be applied if
the landlord obligations are not met and equally if there are
breaches of the Code. The Framework does not establish a complaints
or dispute resolution mechanism. There has been discussion of
BII action being taken in response to complaints but this is not
formalised in the Framework Document and again is reactive rather
than proactive enforcement of Code provisions. Moreover, mention
has been made of the need for 25 complaints per 2,000 pubs before
action may be considered but there is no reference to a time period
for this nor any penalties being applied for persistent breaches.
For example, would code accreditation be removed or membership
suspended? How many "strikes" before a company is "out"?
When the IPC gave evidence to the Committee
in December we set out our requirements from an industry code
of practice: that it be independent of the companies being regulated;
capable of being rigorously enforced and upheld; and carrying
significant and effective sanctions for any breach of its provisions.
This Framework Document fails those tests and we continue to believe
that the only effective remedy will be a mandatory Code of Practice
with access to independent redress. The estate agency and now
the grocery market provide effective models for this type of government
intervention.
We would conclude by noting that the Framework
Document and proposed Codes will do nothing to invalidate the
Committee's substantive recommendation that there is now an urgent
need to ensure that the competition issues related to tied leases
are properly investigated and that the wider legal framework surrounding
the issuing of such documents is robust and adequate.
18 February 2010
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