Pub Companies - Business, Innovation and Skills Committee Contents


Written evidence submitted by Justice for Licensees (JFL)

BACKGROUND

Justice for Licensees (JFL) is a campaign group, initially borne out of the need to discover whether the questionable practices of the pubcos were prevalent across the companies and the country. JFL, through its campaigning, has four hundred and twenty five thousand, six hundred and twenty six (425,626) members and supporters, these consist of tied licensees, free of tie licensees, managers, ex licensees, employees of the industry and consumers. We are very proud to be one of the founding members of the Independent Pub Confederation (IPC) and also work closely with Unite the Union. JFL fully supports the findings and recommendations made in the Business and Enterprise Committee 7th report—Pubcos 2008-09 and the Business, Innovation and Skills Committee report of 2009-10.

SUMMARY

There appears to be systemic failure by the pubcos to comply with the most basic of requirements, the pubcos have proven, once again, that they are incapable of meaningful reform. They have consistently failed to deliver on the recommendations of three inquiries, it is clearly evident that self regulation and self policing have not worked and are not working. There is still a distinct lack of honesty, transparency and fairness, the relationship between landlord and tenant remains inequitable. Legislation is the only answer, there must be a mandatory, statutory COP which addresses the core issues of the imbalance of power between landlord and tenant and also the prime concern of the huge imbalance in gain and reward for input into the business. It is imperative that a mandatory, statutory code now be introduced with all due haste. The mandatory, statutory code must include:

—  A genuine free of tie option with an open market rent review in accordance with RICS guidance.

—  Compliance with RICS rental valuation guidance.

—  A guest ale right for those who choose to remain tied.

—  Removal of the AWP machine tie.

1.  Surveys

—  1.1 In January of this year JFL ran two surveys of pubcos tenants, one for past tenants (1) and one for present tenants (2), copies of which, with the findings and comments, are attached. We decided to run two surveys as we were painfully aware of the level of "churn" since the gathering of evidence by BEC in 2008-09.

—  1.2 Of the current tenants surveyed 78% did not believe that their rent charges are fair, maintainable and sustainable, 40% are paying over 19% of turnover in rent. Of previous tenants 91.1% did not believe that the rent they were charged was fair, maintainable or sustainable and 65.8% were paying over 18% of turnover in rent.

—  1.3 78% of current tenants surveyed draw less than £10,001 income from the business, the results for the previous tenants are even more shocking with 83.6% drawing less than £10,001. Considering the hours worked, which are out of kilter with time directives, the majority of those surveyed earn much less than the national minimum wage. Tenants are having to seek second jobs, which with the hours worked for the pub is not good for the health or benefits, which are a drain on the national economy.

—  1.4 An astounding 83% of current tenants and 94.9% of previous tenants believe that the tie led their business into being unable to effectively compete in their market place.

—  1.5 82.3% of previous tenants and 79% of current tenants do not believe that the BII will be able to effectively police the industry. 78% of current tenants do not believe that their Code of Practice will help their business.

—  1.6 95% of current tenants and 97.5% of previous tenants believe that there should be a complete and full investigation of every aspect of the pubco model by a totally independent body.

CONCLUSION

There still remains a huge imbalance in power between landlord and tenant, with the tenant having little in the way of redress and the pubco still taking the lion's share with little work or support to warrant the take. This impacts on the general well being of the pub sector with closures and churn still abundantly apparent, it also impacts on the general economy with a cost to the government of benefits, a rise in unemployment figures and social housing. There is no excuse for the tax payers of this land to support irresponsible, incompetent and greedy companies.

2.  Codes of Practice (COP)

—  2.1 Whilst we agree that the Codes of Practice are a step in the right direction, we are concerned that it is a very small step that fails to address many of the serious issues in the imbalance of power between landlord and tenant. We were also concerned to learn that some of our members were not advised to seek legal advice before signing for the COP's, we feel that this is far from satisfactory, the pubcos have already made it clear that breaches of COP's can and will be used in a court of law if they deem it necessary. We are also very concerned that some pubcos appear to have used this opportunity to place further onerous conditions on their lessees, surely a Code of Practice is an undertaking by a company or organisation on how they should act, not how they customers/clients are to act, it should be the lease which dictates how the tenant is to act and not a COP.

—  2.2 JFL has found that the number of potential COP breaches and questionable practices outside of the COP's are escalating rather than decreasing. We are also concerned that the mechanisms in place to bring the pubcos to heel on disputes are not hard hitting enough and do little to encourage the pubcos to behave themselves.

—  2.3 The British Beer and Pub Association (BBPA) in conjunction with the IPC carried out a survey into the new COP's (3), we believe that this was not designed to be a comprehensive survey of tenant satisfaction and therefore should not be taken as such. It is indicative of some failure by the pubcos, that 23% of existing tenants were not aware of COP's, nearly one third of existing tenants did not receive COP's and that 8% of new tenants did not know about COP's. 56% of existing tenants and 56% of new tenants were unaware of PIRRS and 22% of new entrants did not take PEAT. 17% of new entrants did not receive trading history and 10% felt that FMT had not been explained properly. 44% are still tied for AWP and of that 44% 54% of those had not had the machine income removed from the divisible balance and 15% of new entrants said machine income had not been removed from the divisible balance, this in despite of the BBPA's assurances to the committee that AWP income had been removed from the divisible balance, either the BBPA are misinformed and therefore incompetent for not finding out the truth of the matter or they are as complicit as the pubcos in being economical with the truth.77% had not been offered a FOT agreement and 74% had not received any discounts or rent reduction. Considering that the pubcos are still under scrutiny this does not bode well for the future when scrutiny is removed.

—  2.4 In the BISC 5th report the committee concluded "The new Framework Code of Practice appears to be a modest step in the right direction. Of necessity it provides a framework for companies of all sizes. We expect the major pub companies to treat it as an absolute de-minimus requirement and to significantly build on it with their own Codes. Only by doing so will pub companies be able to demonstrate that they are committed to reform."

—  2.5  We are concerned that many pubcos have not significantly built on the absolute de-minimus requirement.

CONCLUSION

The COP's are not the answer to the woes of this sector of the industry. There appears to be systemic failure to comply with the most basic of requirements, the pubcos have proven once again that they are incapable of meaningful reform. The COP's fail to deliver a balance of power between landlord and tenant and fail to address in any way the huge imbalance in gain and reward for input into the business.

3.  Pre Entry Awareness Training (PEAT)

—  3.1 JFL advised on PEAT. We consistently made the steering group aware that we did not feel that PEAT went far enough. Some points made were taken on board, however when it came to the crux of the issues these were ignored. We are disappointed that 22% of new entrants did not take PEAT.

CONCLUSION

Peat is another very small step in the right direction, it requires further honesty and transparency and more of a will to ensure that new entrants are not only made aware but also have to take the training.

4.  Pubs Independent Rent Review Scheme (PIRRS)

—  4.1 We feel that PIRRS is another step in the right direction and it should be welcomed that there is a cheaper entry route into rent review disputes, that said there are some areas of concern.

—  4.2 Should a tenant decide to go to arbitration through RICS details of the arbitrator's calculations are supplied and there is the possibility of a right of appeal, PIRRS arbitrators supply a brief summary and there is no right of appeal. Arbitrators are only human and therefore it is not beyond the realms of possibility that mistakes can be made, if the arbitrators calculations are not made clear and there is no right of appeal this leaves the tenant and landlord in a less favourable position.

—  4.3 With a PIRRS determination there is a Deed of Variation (DoV), with RICS there is not, we were particularly perturbed to learn that the DoV contains a forfeiture clause.

—  4.4 A PIRRS resolution contains a None Disclosure Agreement (NDA) or confidentiality clause, "The confidentiality clause is in place to protect the private information declared by both parties via their submissions to avoid sensitive information from being used detrimentally".

CONCLUSION

PIRRS is another step in the right direction however it requires further examination and strengthening to ensure that honesty transparency and fairness are the order of the day. We believe that it would be favourable if both the arbitrator's calculation and the right of appeal clauses were re-examined by the PIRRS board. Forfeiture of lease clauses should not, under any circumstances, be included in the rent review process, the pubcos have the lease to rely on should they need to forfeit the lease. With reference to the NDA we would have to question detrimental to whom? Surely if it is the correct rent, set at the FMT and following RICS new guidance how could this information possibly be detrimental, unless of course the pubco are trying to enshrine rental reductions in secrecy and to prevent them being used as comparables in other rent reviews.

5.  Dispute Resolution Service

—  5.1 JFL maintains that there is a need and requirement for a dispute resolution service for this sector of the industry. We believe that it has been clearly shown there are some practices which fall outside of the limited COP's and rental disputes resolution services.

—  5.2 The majority of tenants cannot afford lengthy and costly court cases.

—  5.3 We are aware that the BII have implemented a mediation service.

CONCLUSION

There is a dire need for a resolution service which covers areas other than COP breaches or rental disputes. This must be quick, efficient and not costly to the tenant. We are unsure whether the BII have the authority to effectively deal with the pubcos.

6.  Free of Tie Option

—  6.1 The pubcos have been quite vocal that they have FOT options, however in reality these are little more that FOT pricing with either increases in rent or other sizeable payments to secure the pricing. The pubcos have failed to offer a genuine FOT option, that is the ability to purchase products from wherever the tenant chooses without fear of breaching the contract, accompanied by an open market rent review following RICS new guidance.

—  6.2 There is a systemic failure to offer a guest ale provision.

—  6.3 At the Save the Pub debate in the House of Commons the pubcos finally admitted, despite all the spin to the contrary, that they do not offer a genuine FOT option with an open market rent review following RICS guidance.

CONCLUSION

Government must legislate to include the above, obviously the pubcos are not going to do this willingly. There is an urgent need for a mandatory, statutory code to include a genuine FOT option accompanied by an open market rent review in compliance with RICS guidelines and a guest ale provision for those who choose to remain tied.

7.  Rents and AWP machines

—  7.1 Rental levels appear to remain high and seem to fail to take account of the fact that a tied tenant should be in no worse of a financial position than a FOT tenant, despite the encouraging new guidance from RICS.

—  7.2 Pubcos are circumventing rent reviews with shorter leases of less than five years which fall outside of the Landlords and Tenants Act and contain RPI index linked rents, in other words a yearly rent rise, without taking into account the fall in beer sales and the hardships faced by the hospitality sector. This ensures that rental levels are an ever upward cycle and fail to take into account FMT.

—  7.3 Both the BBPA and the pubcos have assured the committee that AWP income now falls below the divisible balance for rental negotiations and indeed it is included in the BBPA's Framework COP. However the reality is that the pubcos still take AWP machine income into account when putting forward rental bids, in other words they are still taking two bites of the cherry by taking a percentage of the machines profits and then rentalising the tenants incomes from AWP machine agreements. This is abundantly apparent from the findings of the BBPA/IPC survey, also Simon Townsend admitted in the trade press that machine income was taken into account when rental bids are made and the following is an excerpt from a BDM's email concerning a rent review "as the divisible balance and machine income are considered together for the purposes of the rent review as machine performance is part of the pubs income and logically must have some bearing on rental bids."

CONCLUSION

We believe that it is imperative that there is a mandatory, statutory code which includes compliance with RICS rental valuation guidance in order to prevent circumnavigation and abuse by the pubcos. There is a need for the removal of the AWP machine tie. The pubcos have proven conclusively that they are incapable of operating the AWP tie fairly therefore the only course of action left open is to remove the AWP tie.

8.  Competition

—  8.1 Many of our members believe that the alleged counter veiling benefits for the privilege of the tie to do not equate to the cost of the tie and would prefer to be FOT and not have the alleged counterveiling benefits. They believe that they are restricted in their product choice and that they cannot compete effectively in their market place whilst under the onerous restrictions of the tie.

CONCLUSION

JFL is of the opinion that the tie, as it is currently being operated, is anti competitive and restrictive, that the pubcos operate in a cartel like manner and would question whether there has been foreclosure and price fixing in this sector of the market.

9.  British Institute of Innkeeping (BII)

—  9.1 There are a large percentage of our tied members who do not believe that the BII are best placed to serve this industry as policemen of the industry, they believe that the BII are ineffective. The reasoning for this covers views such as they have failed previously and have been complicit in the current status quo, there are conflicts of interest as the BII have revenue streams from the pubcos, that the BII are bullied and dictated to by the pubcos, that the BII are weak and ineffective and simply do not have the tools or authority to deal with the pubcos, this is just a sample of the more popular views.

—  9.2 JFL has passed on some complaints to the BII from tenants who feel that they have been bullied, intimidated, lied to and generally not treated how they would expect a respectable company to treat their so called business partners, in some cases the BII have managed to achieve some results, but never a fair balance, in other words the pubcos were getting off the hook somewhat, in these cases we felt somewhat sorry for the BII as they more than tried their best but did not seem to have the authority to bring about a fairer resolution. In some cases JFL has been extremely disappointed by the BII's response.

—  9.3 We are exceedingly disappointed that 56% of current tenants and the same for new tenants are not aware of PIIRS, we would question whether the same is true of the new mediation scheme, or if the figure are even worse due to the fact that it is much newer than the PIRRS scheme.

CONCLUSION

JFL maintain that the BII are best placed to serve this industry as the policemen due to the fact that the system and set up is already in place however we carry some severe reservations over their effectiveness and ability to fulfil that task.

10.  Beer Monitoring Equipment

—  10.1 JFL is aware that tenants are still being fined for buying out solely off the data from the beer monitoring systems. We are also aware that the pubcos are still using the threat of costly court action to ensure that tenants sign agreements that they have bought out.

—  10.2 Tenants are reporting that calibration is either not happening or is laughable. JFL is receiving no reports of outside verification unless the tenants themselves are requesting verification from Trading Standards.

—  10.3 We are aware that data collected is manually adjusted.

CONCLUSION

The efficiency and reliability of beer monitoring systems remains very questionable. It is not acceptable that tenants are fined off the findings of equipment that has been found to be unreliable. It is now clear that the Weights and Measures Act of 1985 must be amended to include beer monitoring equipment.

11.  Pubco arguments

—  11.1 The pubcos have argued that it is not their fault, that it is due to incompetent tenants, however it is the pubcos that have allowed these tenants to run pubs, are they saying that they have been totally irresponsible in allowing incompetent tenants to run pubs? The pubcos should and must have adequate procedures in place to ensure that only competent tenants are allowed to run pubs. Considering the extent of the problems across the whole tied estates JFL does not believe that this is the case at all and that the pubcos have to admit the level of incompetence and irresponsibility on their own part.

—  11.2 The pubcos have argued that the majority of their estates are happy with the tie and relationship and that the problems are restricted to a vocal minority. As there has never been a full market study of this sector of the industry, in the last twenty plus years that we are aware of, we could not categorically state whether this is the case or not. However from our own research from our extensive membership we would be content to believe that it is not the case at all and that there are sufficient numbers of tenants who are unhappy with the tie and relationship to warrant government intervention and legislation.

—  11.3 The latest argument from the pubcos is that if they were forced to offer a genuine FOT option with an open market rent review that it would put their business in jeopardy. If the pubcos first two arguments hold any water then this is a mute argument as they would not be allowing incompetent tenants to run their pubs and if the majority are indeed happy then they would not opt for this option and therefore their (Pubcos) business would not be in jeopardy. Does this argument in itself not show the pubco model to be what it truly is? If their tied agreements were indeed comparable to FOT agreements then why would their business be in jeopardy?

—  11.4 They have also argued that a genuine FOT option with an open market rent review would wreak havoc on pubs and increase failure, but how can this be? Rents would be set in accordance with RICS guidelines and so would be set on the Fair Maintainable Trade that could be expected of a reasonably efficient operator, not outstanding but reasonably efficient. Is that not how it should be? Is that not how the pubcos currently set their rents? Therefore where is the problem? The tenants would be able to choose which products they decided to stock and would be able to cater for their customers preferences, without being restricted to a product list and they would be able to negotiate the best price so enabling them to become more competitive. This could also enable them to increase their profits and turnover, so enabling them the luxury of being able to re-invest back into their businesses and buildings and so improving the quality of the estates. Also as this is only an option and considering the pubcos other arguments, the majority are happy with the tie and therefore would not choose this option. This argument is the most self serving and ridiculous nonsense that we have heard to date.

FINAL CONCLUSION

There appears to be systemic failure by the pubcos to comply with the most basic of requirements, the pubcos have proven, once again, that they are incapable of meaningful reform. They have consistently failed to deliver on the recommendations of three inquiries, self regulation and self policing have not worked and are not working to address the huge imbalances in power between landlord and tenant. There is still a distinct lack of honesty, transparency and fairness, the relationship between landlord and tenant remains inequitable. Legislation is the only answer, there must be a mandatory, statutory COP which addresses the core issues of the imbalance of power between landlord and tenant and also the prime concern of the huge imbalance between gain and reward for input into the business. That legislation must include a genuine FOT option (that is the ability to purchase products from wherever the tenant chooses without fear of breaching the contract) with an open market rent review in accordance with RICS guidelines, compliance with RICS rental valuation guidance, with a guest ale right for those who choose to remain tied. The pubcos have proven that they are incapable of behaving fairly with the AWP tie therefore the privilege should be removed. There is a dire need for an independent dispute resolution service to address and rectify problems that may arise.

RECOMMENDATIONS

Mandatory, statutory code to include but not be restricted to:

—  A genuine free of tie option with an open market rent review in accordance with RICS guidance. This would ensure that the industry does indeed self regulate and police itself. It would help prevent abuse and exploitation of the tied agreements, for the simple reason that should the pubcos abuse or exploit the tie then the tenants would have the ability to enforce the FOT option. There should be a de minimis rule for brewers with less than 500 pubs in order to protect the small and family brewers.

—  Compliance with RICS rental valuation guidance. To prevent circumnavigation and abuse by the pubcos.

—  A guest ale right for those who choose to remain tied. To help the small and microbrewers and to aid competition.

—  Removal of the AWP machine tie.

FURTHER RECOMMENDATIONS

An independent dispute resolution service to address disputes between landlord and tenant, this service should not be restricted to rental or COP disputes.

The Weights and Measurements Act 1985 requires amendment to include beer monitoring equipment.

The removal of UORR clauses from all contracts to prevent abuse.

The industry to examine, improve and strengthen PIRRS and PEAT.

The industry must ensure that it agrees on and delivers guidelines on the average costs of running a pub.

The industry must ensure that it delivers a nationwide register on rent reviews and rental levels, to ensure honesty and transparency.

20 June 2011



 
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© Parliamentary copyright 2011
Prepared 6 October 2011