Pub Companies - Business, Innovation and Skills Committee Contents


Written evidence submitted by the Fair Pint Campaign

SUMMARY

Codes of Practice development of BBPA's Framework Code;

The BBPA Framework and subsequent Company Codes do not address the issues that are the root of the Select Committee Inquiries, balance of the relationship, tenant profitability. It follows the Codes are far from robust. No pubco has sought to address the preliminary issues, of fundamental commercial importance and as such minor developments on none essential issues are relatively meaningless.

It should not be difficult for pubcos to comply with the, relatively low priority issues addressed in the Codes. We would not anticipate many Code breaches to be documented as the Codes do not address the real priority issues. Most complaints fall outside the Codes conditions.

We do not consider the BII to be a credible or effective policeman of the industry.

The BII have no real enforcement or penalty powers. Any apparent Code dispute resolutions are seen as a temporary concession while under scrutiny.

AWP machines

No pubco has satisfied the previous Committees repeated recommendations; to offer free of tie options.

Flow monitoring equipment;

The previous Committee have misinterpreted, or been misled, into the false belief that the BBPA Framework Code adequately seeks to reconcile the problems with flow monitoring equipment. It does not, contrary to the Committees interpretation, there is no inclusion of a mandatory requirement for additional evidence above and beyond the data from flow monitoring equipment in any accusation of buying outside of the tie.

The Committees interpretation of the BBPA Framework, outlined in the BISC summary should be made a mandatory clause within an enforceable statutory Code.

BBPA advice to prospective publicans;

There is no significant advice being offered by the BBPA to prospective publicans. The BBPA do not represent publicans and have no individual publican membership.

New RICS guidance

The guidance is a vast improvement on its predecessor, if applied correctly the tied tenant should be no worse off than if free of tie.

We are already witnessing wholesale none compliance with the new RICS guidance by the pubcos. Even compliance on the RICS guidelines alone would not inhibit the pubcos from adjusting the price of tied products to compensate themselves for any lost revenue as a result of rents being set fairly.

The creation of an industry benchmarking survey;

There is no industry benchmarking survey.

Complaints procedures and disputes mechanisms;

There is no effective and independent complaints or dispute mechanism.

A dispute resolution system has been introduced by the BII. By their own admission the BII do not claim independence, they have no authority or enforcement powers and the resolution mechanism is perceived as ineffective amongst tenants, demonstrated by the limited take up. We do not believe the BII are the appropriate organisation to fulfil this role.

Genuine free of tie options with an open market rent

No pubco offers a genuine FOT option in accordance with the Committees recommendations.

Previous Committees have made it clear that a FOT option with a huge unsubstantiated rent increase is not good enough. An open market rent review under the RICS new guidelines is what is required with a FOT option.

BII guidance

The BII have a pre entry training (PEAT) course available on line, it takes about two hours.

We do not consider this adequately informs prospective tenants of the type of pub leases available and what the options mean in reality. Free of tie, tied pricing and tied agreements are complex and business support and countervailing benefits if available difficult to quantify and understand without individual specialist expert advice.

Introduction

1.  The Fair Pint Campaign (FP) is a membership organisation that campaigns for the interests of tied tenants. FP has a membership of around 1,000 tenants, funded entirely from donations.

2.  FP provided written and oral evidence to the Business and Enterprise and Business Innovations and Skills Select Committee Inquiries on pub companies. We welcomed the Committee's views that the balance of risk and reward between pub owning companies ("pubcos" including brewers) and tied tenants is unfairly skewed towards pubcos and the fact that, despite bearing most of the risk, tenants do not receive a fair share of the benefits.

3.  FP is a founding member of the Independent Pub Confederation. We endorse the IPC Charter. The collaboration of tenant organisations and CAMRA is the first time a collective and genuine voice has been given to publicans and consumers in an industry which has for too long being dominated by the property and brewing interests represented by the BBPA.

4.  We believe that the agreement between the BBPA, BII and FLVA to a Code Framework is a totally inadequate response to the problems highlighted by the Select Committees, and shows unwillingness by the industry to consider change which would rebalance the relationship between tied tenants and pubcos in any significant way.

5.  The OFT's reasons for their rejection of CAMRA's super-complaint showed that the Select Committee was correct in its judgement that the OFT would not be able to scrutinize the pub market in a satisfactory way. They have failed to understand the industry and how the unbalanced relationship between tied tenants and pubcos, highlighted by the Select Committee, leads to clear tenant and consumer detriment.

6.  FP believes that developments in the industry since the publication of the Business and Enterprise Select Committee report strengthens the case for government intervention in the sector. The major pub owning companies have shown that they are unwilling to take any steps to significantly alter the balance of risk and reward between landlords and tied tenants and have used the time offered to simply seek ways to circumvent reform under a veil of apparent compliance.

7.  We believe that the Committee ought to repeat its recommendation that Ministers refer the pub sector to the Competition Commission with a view to freeing up competition in the market by rebalancing the relationship between tenants and pub owning companies including action to prevent companies being able to use supply ties in an exploitive way.

8.  The tied model in its current form does not work and is in urgent need of reform. The only achievable way we see to avoid a Competition Commission referral is to recommend a mandatory, statutory Code, with genuine penalties for Code breach and capable of independent enforcement. This Code should encompass all the previous Committees recommendations most fundamentally, a free of tie option with an open market rent for new and existing tied tenants, and a guest beer right for all tied tenants, in accordance with the IPC's Charter.

9.  Overview

10.  Since 1966, there have been at least 25 separate inquiries, not one has given the tied model a clean bill of health, all have allowed its continuation with reservations.

11.  The operation of the tied model has been deemed unfair by successive Select Committees, and by the last government, all have concluded that reform is needed. The issue was how that reform should happen, the debate now is whether or not it has.

12.  A Code of practice has never been the issue and was only ever regarded as a way of introducing some of the recommended and required reforms, to be effective it relies on the key reforms being included in Codes—they are not.

13.  FP have always felt that the Code route was potentially dangerous, as the mere publication of them, without the core demands of the Select Committee, may inexcusably be regarded by some as sufficient.

14.  Instead of implementation, the time offered to pubcos and brewers by previous Committees has been used to avoid reforms and reinvent their agreements, introducing annual inflationary increases, often with no rent review or lease renewal rights, offering no security of tenure, and effectively circumventing the new RICS rental guidance. We have also seen the resurrection of Minimum Purchasing Obligations (MPO) which require the tenant to purchase a fixed amount of tied products every year and penalise them on failure.

15.  An annual increase in rent and/or obligations to purchase a predetermined amount of tied products in a declining market is a recipe for disaster. This recent evolution in agreements is considered to be nothing more than an effort to avoid genuine reform and outwit the Committees recommendations and RICS guidance in an attempt to maintain the rent roll at the tenants expense.

16.  Whether the Pub Companies' individual Codes of Practice are robust enough and whether the maj or pub companies have built upon the de-minimus requirements of the BBPA's Framework Code;

17.  Previous Committees sought an industry agreed Code. Influential organisations attended a mediation in an attempt to reach a common agreement. The mediation failed, the BBPA Framework, and individual Company Codes born from them, are not industry agreed Codes.

18.  Only the BII and FLVA agreed to the BBPA's Framework proposal, both organisations derive income from the pubcos. This income stream is perceived to be a potential conflict of interest, jeopardising the organisations impartiality.

19.  FP sought at mediation to ensure that the BBPA Framework incorporated the previous Committees recommendations, most particularly relating to the tie. The failure of the mediation is indicative of the fact that the BBPA were not prepared to address anything but the low priority issues thereby ensuring the "bar" was set low. Individual company Codes would have little benefit to tenants.

20.  Whilst the issues of importance are absent, even from an enforceable Code, tied tenants profitability will not improve and they will continue to suffer abuse from dominant pubcos who maintain the power of the relationship. Like their predecessors the individual Company Codes are neither robust or specific to the priority issues.

21.  If the Codes of Practice are being complied with;

22.  We would not anticipate many Code breaches to be documented as the Codes quite simply do not address the priority issues. We are aware of many instances where a complaint has been made to the BII who have confirmed that they are restrained from implementing a Code breach complaint investigation as the issue falls outside the Codes jurisdiction.

23.  The majority of complaints FP receive relate to abuse, intimidation and profitability, none of which are breaches as they are not addressed in any Code. The whole purpose of establishing a weak Code is to maintain "usiness as usual" under a veil of complicity, which in reality is meaningless.

24.  Survey evidence will be put to the Committee, through IPC and other member organisations, demonstrating that Code requirements such as circulation of the Codes, mandatory pre entry training (PEAT) and awarenesses of the pub independent rent review scheme (PIRRS) are all well below the anticipated standards.

25.  How the BII is policing the Codes and whether this is effective;

26.  There is still considerable anxiety amongst tenants that raising a complaint will encourage repercussions from their pubco and many continue to suffer in silence. FP have seen a huge increase in direct contacts from tenants feeling bullied and intimidated but there is very little confidence that registering a complaint would be anything more putting themselves in the firing line. Many tenants seem to be aware that complaints in respect of bullying or profitability are not Code breaches and that the BII are powerless to enforce or penalise pubcos even if a Code breach could be established.

27.  FP do not consider the BII have been effective in policing Codes as they lack credibility amongst tenants, whether this is as a result of their perceived conflicts of interest, there being financial connections with pubcos, or the reality of their "paper tiger" status is difficult to assess.

28.  Robust Codes, and the successful policing thereof, go hand in hand and are both vital to the success of any reforms. FP shared the Committees cautious welcome to the BII's role in policing the Codes of Practice, they were the reluctant choice from a limited and imperfect list of potential candidates. The selection of a body to scrutinise a Code written by the people who fund the same body does not seem to be an ideal starting point, given the suspicion that exists and the problems faced by the industry.

29.  FP do not consider the BII to be a credible or effective policeman of the industry. What is needed is something that is mandatory and statutory, like a license to operate tied and tenanted pubs. To obtain the license an individual company would need to sign up to a Code encompassing the priority issues of profitability and abuse of a dominant position, which is genuinely enforced with real financial penalties by an unquestionable independent body.

30.  The enforceability of the Codes;

31.  The Codes cannot be effectively enforced as they are not independent of the companies being regulated, incapable of being rigorously enforced and upheld, and carry no significant or effective sanctions for any breach of their provisions.

32.  The only effective remedy will be a truly enforceable, mandatory Code of Practice with access to independent redress. The estate agency and grocery market provide effective models for this type of government intervention.

33.  If AWP machines are now being treated more fairly and tenants are being given a genuinely free of tie option;

34.  Previous Committees have expressly sought the removal of the machine tie. Neither the BBPA Framework or any individual pubco Company Code has attempted to accommodate this recommendation. FP consider this to be a clear example of avoidance of an express and simple requirement.

35.  There has been an "apparent" tentative step to remove the AWP income from the divisible balance in rental valuation but in reality, once again, the pubcos have simply sought to present the illusion of concession whilst financially engineering revenue from AWP income back in elsewhere.

36.  No pubco has seriously offered free of tie options. This was a basic and fundamental Committee requirement and their failure to deliver reform is a clear indication of the resistance to offer anything of real benefit to the tenants.

37.  The treatment of flow monitoring equipment;

38.  Contrary to the Committees understanding, outlined in the BISC summary, the BBPA Framework does not adequately seek to reconcile the problems with flow monitoring equipment. The BII have confirmed there is no inclusion of a mandatory requirement for additional evidence, above and beyond the data from flow monitoring equipment, in any accusation of buying outside of the tie.

39.  Some pubcos and brewers have sought to rise to include the Committees interpretation in their Codes. One notable exception would be Enterprise Inns, their Code simply requires that, if suspected of buying out, the tenant should produce their confidential trading information for inspection, failure to comply may result in a fine with no additional evidence to support the accusation other than the data from flow monitoring equipment. Tenants are reluctant to disclose this confidential trading information as it is typically used, inappropriately, as a basis for the assessment of rent at review or lease renewal.

40.  FP have been actively seeking intervention and enforcement of the Weights and Measures Act 1985 by Trading Standards authorities and many flow monitoring systems have been tested in individual pubs. Whilst inaccuracy has been successfully established as commonplace, no authority is prepared to act. The Local Government Ombudsman is currently investigating at least two Trading Standards departments in respect of their failure to act where inaccuracies were established, and tenants possibly falsely or unjustly fined, on the flow monitoring information alone.

41.  Flow monitoring equipment is not prescribed, verified or stamped and as such only falls under the Weights and Measures Act 1985 if proved to be "in use for trade". In their "Comprehensive Guide to Flow Monitoring", Brulines state openly that they are "…confident that the commercial application of its equipment, as utilised by our customers and as described in this guide, is not "use for trade" ie measurements are not taken directly from the flow meter and applied as fines or levies." We of course know this to be blatantly misleading and I include in the Appendices invoices clearly demonstrating that measurements from Brulines equipment are used directly to calculate the fines (Appendix 1).

The flow monitoring dispute still rages and for good reason, the fining of tenants provides a sizeable income for the companies involved, documents from Brulines indicate the level of fines since 2006 has steadily increased from £2.7 million to around £10 million a year (Appendix 2).

42.  The National Measurement Office, have clarified the position of beer flow monitoring equipment in relation to the Weights and Measures Act 1985, the system is not prescribed, verified or stamped. Tests were undertaken but the NMO have drawn no conclusions and have importantly not accredited the system as accurate or fit for purpose.

43.  FP agree that the Committees interpretation of the BBPA Framework addressing flow monitoring should be made a mandatory clause within an enforceable, statutory Code. The system should not be in "use for trade" as defined in the Weights and Measure Act 1985.

44.  The advice being provided by BBPA to prospective publicans;

45.  Other than a modest document on the BBPA website very briefly outlining the agreements available there is no apparent advice being offered to prospective tenants. The BBPA have no tenant membership and arguably are not the appropriate body to be providing advice to prospective publicans given their clear and undeniable relationships with pub owning companies.

46.  The effectiveness of the new RICS guidance on pub rental valuations and whether it provides clarity on the principle that a tied tenant should be no worse off than a free of tie tenant by defining what constitutes a countervailing benefit;

47.  We consider the new guidance has sought to clarify a number of issues and it is a vast improvement upon its predecessor. There are clauses within the guidance requiring the valuer to consider the hypothetical tenant as if they were free of tie and reflect that in the rental assessment and examples of countervailing benefits have been listed.

48.  The effectiveness of the new RICS guidance relies upon its implementation. The RICS are not in a position to take disciplinary action against non surveyors and this is seen as a fundamental flaw. Individual Company Codes, in the main, contain a requirement to follow RICS guidance but already we are seeing non observation of its contents.

49.  We are aware of several ongoing rent review and lease renewal negotiations with various pubcos, none appear to be making reference to the RICS guidance particularly in respect of the tenants bid. We are aware David Morgan of FP proposes offering a detail submission in this regard which will substantiate our findings.

50.  It has recently come to our attention that Enterprise Inns, having little faith in the ALMR benchmarking findings, conduct their own benchmarking surveys. Under the newer Enterprise Inns agreements, lessees are required to agree to open book accounting. The appointed accountants undertake the benchmarking surveys. The results of these surveys demonstrate that, even within the Enterprise Inns estate, costs as a percentage of turnover are practically exactly the same as the ALMR's findings, 42% for pubs turning over £3,000 a week. The October 2010, survey is attached in Appendix 3, the net of rent overall cost is shown in red. You will also note that tenants of pubs turning over <£3,000 a week are earning -£41 a week, a loss of over £2,000 a year. The average, £3,000-£6,000, sees tenant earnings at just £9,000 a year (£163 a week).

51.  To quantify the importance of ignoring the benchmarking, I attach in Appendix 4 two calculations, one is taken directly from the Enterprise Inns 2011 Interim Accounts, seeking to demonstrate their average tenant earns an estimated £35,000 (plus a notional £10,000 benefit for living above the pub). The other calculation uses exactly the same figures changing nothing but the costs to the appropriate benchmarking evidence, 42%.

52.  By simply adopting the appropriate average costs of 42%, instead of Enterprise Inns unsubstantiated 35%, the tenant earns £10,680, not the £35,000 claimed. This corroborates the Committees survey findings from the BEC 2008 that 67% of tied tenants are earning less than £15,000 a year.

53.  We have seen no evidence of transparency or openness during review negotiations and we are already seeing evidence of systematic non recognition of the new guidance. On an optimistic note, we consider the apparent refusal by some to follow RICS guidance demonstrates that, if adopted properly, it may have the desired effect and deliver the required adjustment to falsely inflated tied pub rents.

54.  FP foresee wholesale non compliance with the new RICS guidance if no mandatory clause within an enforceable statutory Code exists. As long as the new guidance continues to be ignored or manipulated the problems of false, over inflated, rents will continue unhindered into the future.

55.  The availability and effectiveness of complaints procedures and an independent disputes mechanism;

56.  The BII has recently introduced a dispute resolution service. FP representatives have acted as advisor's to tenants at informal mediation with some degree of success, however, we very much see this as reluctant participation by the pubcos under the spot light of scrutiny.

57.  As there is no complaint procedure of dispute mechanism with any enforcement power requiring the participants to comply with the genuine third party findings an effective mechanism remains unavailable.

58.  The availability of genuine free of tie options ie an open market rent review under RICS new guidelines, ability to buy beer from any source;

59.  The BESC 08 stated quite clearly the only way to effectively "test" the fairness of the tie was to offer a genuine free of tie (FOT) option, which allows tenants to purchase beer in openly competitive market, from any source, at a fair and reasonable rent.

60.  Select Committees & government presented a clear message to the industry on what is required—a FOT option with a huge unsubstantiated rent increase is not good enough. An open market rent review under the RICS new guidelines is what is required with a FOT option.

61.  Some "purported" FOT options are currently available. In reality, none satisfy the BESC recommendation and government requirement, a genuine FOT option, essentially, has to come with an open market rent.

62.  The options being touted fall in to two basic categories, and both amount to attempts to hoodwink the Committee, government and naïve prospective tenants coming into the sector.

63.  FOT pricing options, such as Punch Taverns are now offering are simply a PR spin, a clever use of the emotive words "free of tie" which are, in reality, temporary discount schemes in exchange for a rise in rent. Fundamentally, these are not FOT, the tenant is still obliged to purchase from the pubco. Under these agreements the pubco still achieve a profit margin due to their buying power, this is valuable to the pubco and the opportunity for the tenant to remove it, with a genuine FOT option and open market rent, is what would redress the balance of bargaining power between the landlord and tenant. The main feature of a genuine FOT option is the ability for the individual tenant to police their tied relationship with their pubco. If the tenant is able to exit an abusive relationship, then the pubco will be discouraged from bad behaviour and encouraged to promote a relationship that truly benefits both parties to the agreement. The Committees test of the "fairness" of the tie but an impossibility under the FOT pricing schemes.

64.  A few agreements are FOT in exchange for an annual fee compensating the pubco for lost revenue and therefore saving the tenant nothing. These agreements allow the tenant to acquire products from any alternative supplier but typically offer tie release only on limited products. Full release offers, on all products, are few and far between and are offered only in return for an unsupported increase in rent, an annual tie release fee. Most full releases that do exist are temporary, like the Marston's, "Ultra Advance" agreement, this is a "bolt on" agreement to the tied lease and lasts for only three years. The tenant has no right to renew the temporary release on products.

65.  Enterprise Inns say they offer FOT options but only with an entirely new agreement. In practical terms, Enterprise typically offer release on certain low volume sales products to fully tied tenants (like wines, spirits and minerals). An option to be FOT on all products, including beer, is not available other than on extremely rare occasions (Enterprise Inns have only 94 out of their estate of over 6,700 on completely FOT agreements). FP are aware of no existing tenants that have been offered any form of FOT option on all products. Any tenant wishing to relax their tie would be required to agree a new lease agreement. Enterprise Inns new agreements are significantly more onerous than existing agreements containing, for example, inflationary increases, minimum purchase obligations and open book accounting.

66.  A genuine FOT option could quite simply be offered in the form of a deed of variation to existing leases.

67.  FP do not consider there will be any significant interest in any of the "new" options as they do nothing more than seek to give with one hand whilst taking back with the other, in an attempt to offer the illusion, to the next Select Committee, of compliance with the genuine FOT option recommendations, whilst failing to address the key requirement, an open market rent established in accordance with the RICS guidance and, failing agreement between the parties, determined by a third party (arbitrator or independent expert).

68.  FP would deter any tenant from accepting any of the supposed FOT offers currently available from any pubco or brewer. Put simply none of the offers increase tenant profitability.

69.  In evidence presented to BESC 2008, the Committee were faced with two irreconcilable pictures of the industry. The pubcos claimed that their tenants preferred the tie and would keep it, if offered genuine FOT options. FP claimed the higher costs imposed by ties meant that lessees were at a disadvantage to free of tie competitors and that, if offered, most tied tenants would take the FOT offer if it were accompanied by an open market rent.

70.  The pubcos have now dropped their line of argument in this regard, falling back on their last line of defence, and the perhaps finally the truth of the situation. The recent admission by Roger Whiteside that "It (going further than the FOT pricing) would put the business model into serious jeopardy if that were to happen overnight.". The implication being that what is being sought is an immediate abolition of the tie. This is not the case. The proposal is for a fair option implemented over a phased period (on letting, at rent review or lease renewal), its very availability would encourage pubcos to offer a fairer tied agreement and a more cooperative relationship if they wished to maintain the benefits of their buying power.

71.  FP believe that the compromise of a genuine FOT option with an open market rent is a bare minimum standard requirement if the industry is to recover from its spiral of decline. Without the option, there will be nothing to improve the tenants profitability and abuse and intimidation will continue unhindered, in an entirely foreclosed and anti competitive market. Pubcos will only be obliged to offer a competitive tied agreement if they are forced to offer a genuine FOT option.

72.  The guidance from BII on the type of pub leases available and what the options mean in reality to prospective lessees. This includes free of tie, tied pricing and discounts as well as the business support countervailing benefits available.

73.  The BII have a pre entry training course available on line at the cost of £20, it takes about two hours.

18 June 2011



 
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Prepared 6 October 2011