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

Examination of Witness (Question Numbers 180-199)



  Q180  Mr Clapham: We heard about enforceability from the previous witnesses. Because of the way the code is not totally accepted by the industry you believe that the BBPA code just would not be enforceable?

  Mr Mallen: No. I think it would end up in a long drawn-out process where for years it was contested that in signing the code the pubco had agreed to the terms within it.

  Q181  Mr Clapham: Presumably, the confederation wishes to see a mandatory code and that would be the RICS code?

  Mr Mallen: Yes.

  Q182  Chairman: There are issues in the BBPA code which RICS would not even touch. The question is: what advice can you give the Committee about those other issues that cannot be part of the RICS code which you would like to see mandated? What recommendation should be made?

  Mrs Nicholls: We have to go back to the 2004 report of the Select Committee on Trade and Industry which made a clear recommendation about what an adequate code would cover. We have not seen a copy of the code they are talking about, so we do not know whether that meets the definition of what the Committee asked for at that time. But the Select Committee was quite clear that if the industry did not produce an adequate code and enforce it there should be a statutory one. The only way one can deliver true enforceability is to make something legally binding and bring about real change.

  Q183  Chairman: Should we give them a year or two on the voluntary code or have they already visited the last chance saloon?

  Mrs Nicholls: I take you back even further to 1989 and the MMC which said that the lack of an enforceable—they underlined that word—code of practice meant that brewers could limit the economic independence of tenants and reinforce their position of economic strength. If you substitute "pub companies" for "brewers" you are in exactly the same situation. We have not moved forward since 1989; we have no enforceable code of practice in this industry.

  Q184  Mr Clapham: In terms of scrutiny you believe that the BII is less than an independent redress mechanism. Can you add to that?

  Mr Harrison: You have to deal with two things: the ability of the BII to be genuinely independent in the long term and the perception of it as an independent body. Both of those are extremely hindered by financial connections between pub-owning companies and the BII. We are really looking for an available body to scrutinise a code written by the people who fund the body that is to scrutinise it. Given the suspicion that exists and the problems faced by the industry at the moment that does not seem to be an excellent starting point. We need something that is mandatory or statutory, almost a licence to operate tied and tenanted pubs, and in order to do so you have to sign up to a code which is genuinely enforced with real financial penalties, not just one organisation's arbitrary understanding of what constitutes a persistent breach. Individual breaches can be extremely damaging to tenants; they can put them out of business. The breaches may not be visible until the tenant has already gone out of business. This needs to be statutory, mandatory and properly enforced with financial penalties by a separate organisation. I realise that that is not what the BBPA want to hear, but that is needed in order to give confidence in the sector.

  Mrs Nicholls: It is the absence of effective sanctions and penalties that goes to the heart of it. The evidence is that this year alone there have been 100 cases in which code complaints have arisen. I have not seen anybody's accreditation being removed or anybody leaving the BBPA. There is talk about multiple persistent breaches and then a possible move towards a sanction. I do not see that there is a truly independent and effective sanction. I sit on a property codes compliance board which deals with codes of practice in the residential sector; it deals with HIP and search providers. It is an entirely independent, separate board nominated by public interest bodies and consumer representatives. They are the people who deal with the issues of compliance, not the industry. The industry cannot sit in judgment on itself.

  Q185  Mr Clapham: I turn to PIRRS about which you have expressed some concerns. Perhaps you would take us through them.

  Mr Harrison: Perhaps I may deal with a preliminary point related to the PIRRS website. I am aware that the chief executive of BII, Neil Robertson, is here today. He behaved perfectly in dealing with this. We raised a complaint with Mr Robertson in regard to the declaration of interests of surveyors who put themselves forward to be members of the panel. From the website it transpired that a number of those surveyors had not declared their interest in the way they had been asked to do by the BII. That website was not taken down for a technical reason as Mrs Simmonds said; it was taken down by Mr Robertson for a very sensible and pragmatic reason, namely that as a new system it was potentially exposed to ridicule at an early stage. Very sensibly, he took it down and took forward that matter. To make one quick comment on PIRRS, if Mr Rusholme and the RICS deliver their report properly and address that very seriously—the RICS is capable of behaving in this sector truly independently, which we would argue it has not been—PIRRS ought not to be required at all because the system that should be in operation in most of those contracts ought to run properly. Some people in the BII would agree that that is probably the case and their attempt to come up with an alternative system has also been very useful as part of the RICS consideration. Maybe the RICS have said that somebody else is stepping onto their turf, if you like. I believe that has been very helpful.

  Mrs Nicholls: PIRRS undoubtedly has the potential but it is limited and deals only with rents. The matter we urge you to dig away at again is that there are other forms of complaint where there is no method of independent redress. PIRRS does not deal with it.

  Mr Clarke: As to PIRRS, as Mr Harrison rightly stated there was obviously concern about the independence of some of the surveyors who nominated themselves for the role of independent adjudicator. PIRRS is in its infancy and I am sure there will be various tweaks and consideration will be given to its development as time goes on, but the problem still faced by BII is that it must depend on the disclosure given by the surveyor. For example, Fleurets are still on that independent body. As we speak they have 150 pubco pubs on the market of which 70 are Punch. I cannot see how that can be considered to be independent.

  Q186  Mr Clapham: Looking at some of the evidence we were given, the Federation of Small Businesses told us that PIRRS excluded the involvement of RICS. We heard that that was not correct. Is it your view that RICS is excluded?

  Mr Clarke: I do not think RICS is excluded; nine times out of 10 it will be a RICS man who will be the independent adjudicator. They might have been referring to the fact that PIRRS is not necessarily bound by the RICS code of conduct. Essentially, even if the RICS has come up with a code of conduct that is suitable for the industry it will bind only chartered surveyors. As touched on earlier, BDMs and area managers, who nine times out of 10 are the negotiators on rent reviews, are not chartered surveyors and they will not be bound by that code. As far as I know, PIRRS is to be based on chartered surveyors operating the system and using the same formula and valuation guidance as the RICS guidance that is about to be revised.

  Q187  Mr Clapham: What do you believe needs to be done to make your members feel confident that the pubcos are working with you to create an industry that has a prosperous future?

  Mrs Nicholls: I think we must go back to the Committee's recommendations in its May report. Your analysis and recommendations are right. The only way forward is to work in partnership on freedom of choice, flexibility and fairness. That is what the IPC stands for and we are happy to have dialogue with any stakeholder who shares those aspirations and wants to work with us to deliver them. Ultimately, we come back to the Committee's recommendation that it will not happen on a voluntary basis and the Government now needs to intervene to ensure there is a legal framework and the competition issues are investigated thoroughly.

  Q188  Mr Hoyle: I turn to the very important area of the beer tie. What is the Confederation's collective view on the beer tie? What changes could be made to the tie to satisfy your members and make it workable for them?

  Mrs Nicholls: I make clear that here I speak on behalf of the IPC collectively, so I give the common position and consensus. Our position on the tie is very simple. We support a model that offers fairness, flexibility and freedom of choice and therefore we concur wholeheartedly with your recommendation that the way forward is for lessees and tied tenants to be given that choice. If it works it will be to their benefit; if not, they will remain tied, but that choice can be offered only in the context of the proposed revisions to the RICS rent valuation model based on the prime principle that the tied tenant should be no worse off than if he was free of tie. We fully support the recommendation you made and cannot see that good operators and landlords have anything to fear from offering people a choice.

  Q189  Mr Hoyle: That is interesting because CAMRA says the tie should be kept and the FLVA say it should be abolished, so where does that leave you?

  Mrs Nicholls: We are not here to replace the views of our members who hold disparate views.

  Q190  Mr Hoyle: I did ask for the collective view.

  Mrs Nicholls: The collective view where we do have commonality is support and endorsement of the Committee's recommendation because that allows both sides to keep saying the same things. Your recommendation is a very clever one because it says that if tie is of such great benefit lessees and tied tenants in particular will choose not to exercise their choice. Our position is all about fairness, flexibility and freedom of choice.

  Q191  Chairman: Would you extend that choice to every brewery and pubco or would you put a limit above or below a certain size?

  Mrs Nicholls: To try to make it a pragmatic and straightforward solution, as a first step we would put a limit on it. We suggest that you should adopt the European Union definition of de minimis and exempt those below a certain market share.

  Q192  Chairman: What would that market share be?

  Mrs Nicholls: One per cent of the UK pub market.

  Q193  Mr Hoyle: You say that some small landlords have leases that give them the choice of being free of the tie. How has this been taken up?

  Mr Clarke: The important point to note is that you can be offered the option of free of tie or flexibility of tie. Mr Darby referred to Marston's proposal. I do not know the details of that proposal but I have seen other ones. Nine times out of 10 the opportunity to go free of tie is accompanied by a rental increase which is determined by the landlord who offers that opportunity. I would argue that if you are to be offered freedom from the tie or any flexibility at all which alters the terms of the lease that should be accompanied by a rent review based on open market rental value, not something that is dictated, namely that the tenant can have this but in exchange the pubco wants that.

  Q194  Mr Hoyle: Do you suggest that it is a pub that does not sell a lot of beer anyhow and so they would be quite happy to give up the tie because they could derive income from, say, food and the brewery could get a bigger take by putting up rent due to the volume of beer going through the pumps?

  Mr Clarke: I suppose there is that possibility, but the nature of the profits valuation is that those other income streams would be valued anyway on a cash flow basis. Therefore, there would be gross profits allocated to tie and free of tie products. They are all encompassed in the rental value as it is. The point is that if the lease is changed in any shape or form it is accompanied by an open market rent review.

  Q195  Mr Hoyle: The BBPA has said that pub companies should develop a protocol on the operation of flow monitoring equipment. What would you like to see in such a protocol?

  Mr Harrison: First, we have been doing some work on this with regard to Brulines which is pretty well the only flow monitoring device that is installed in the vast majority of tenanted estates. We have commissioned a report, which we have submitted to the Committee, from SGS which is the world's leading expert in verification instrumentation and certification. In its detailed report it concluded that the system was not fit for purpose, inaccurate and ought not to be put to the use that it is being put. Second, it is not true that LACORS and Trading Standards have approved this system.

  Q196  Chairman: It is said they do not need to.

  Mr Harrison: LACORS do not say that at all but that in their view—we have a letter from Ms Wendy Martin, their policy director—the system is likely to be in use in trade. We have taken leading counsel's advice, which we have also submitted to the Committee, that it is also in use in trade and as such probably falls under weights and measures legislation. LACORS have also suggested that Brulines ought voluntarily to submit their system for testing in government labs. That has not been volunteered yet and we believe that is because it is not accurate and does not work. What we do know about it is that it is inaccurate; it is possibly unlawful and we have been advised that it perhaps also falls foul of the Misleading Marketing Regulations 2008. We know that it is used largely for the intimidation of tenants; that is what happens on the ground and it continues to be the case. Mrs Simmonds did know about direct debits which were used to take money directly out of people's bank accounts because I told her personally when I met her some weeks ago. I spent about 15 minutes talking about Brulines and not much of it seemed to sink in, to be frank, but that is the case. We have done some work on it, so our view is that it is inaccurate; it is possibly unlawful; and it is used for intimidation.

  Q197  Mr Hoyle: The BBPA suggest that evidence in addition to flow monitoring equipment is required by pub companies before accusing a lessee of buying out of tie. What evidence do you suggest is necessary to do this?

  Mr Harrison: It would be for the court to decide, would it not?

  Q198  Mr Hoyle: But is there anything else to add?

  Mr Clarke: Corroborating evidence would be necessary for any sort of action to be taken. The discovery of foreign barrels in a cellar is perfectly good evidence, but nine times out of 10 the corroborating evidence that is used to back the Brulines' evidence is a confession by the tenant which is usually obtained by using Brulines' evidence. It is a self-fulfilling process. You could go to court with all this evidence about singing and dancing and nicely coloured graphs. Here is also a confession by the tenant. When faced with that information at the outset the tenant would consider that a nominal fine and confession would probably be better than the forfeiture of the lease which is what he is being threatened with.

  Q199  Mr Hoyle: It is as draconian as that?

  Mr Clarke: Absolutely.

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