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

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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