Written evidence submitted by the Independent
Pub Confederation
In 2010, the Business Innovation and Skills Select
Committee and two Government Departments issued the pub industry
with an ultimatum—deliver real and meaningful reform to
change the commercial relationship between landlord and lessee,
or face statutory intervention. As the voice of thousands of hard-pressed
tied lessees, we very much welcome the opportunity to submit evidence
as part of this final assessment.
Leased pubs are not only valuable social assets,
they are also wealth and job creators. Each one is a micro business
operating at the heart of the community it serves, providing flexible,
sustainable employment and contributing to the local and national
economy. They are deserving of our protection and support.
They are, however, a sector under threat. There is
no doubt that the competitive pressures faced by all pubs as a
result of a shift in consumption patterns arising from sustained
below-cost selling by the major supermarkets and the recent economic
downturn, have been felt particularly acutely by tied pubs. Prices
in the tied pub sector continue to outstrip not only supermarkets
but also the managed and free of tie estates.
Too many tied tenants still face
paying higher rents and higher prices for their beer than they
would do in a truly competitive market place; forcing them to
struggle for survival and consumers to pay more for their beer.
It is our contention that unfair contractual issues and restricted
competition damages the ability of tied lessees of large pub companies
to provide customers with excellent pubs, service and value for
money.
The OFT's 2009-10 Report on the sector found clear
evidence that this was resulting in clear consumer detriment.
It failed to give a clean bill of health to the contractual relationship
between the national pub companies and their lessees. The ALMR's
Benchmarking Report provides evidence of its impact—lower
investment per premises, lower gross margins and an under-performing
market segment—and the fact that it is no longer adequately
offset by lower rents. Industry efforts to address these problems
have side-stepped these issues altogether.
Urgent action is therefore now required to ensure
the Committee's recommendations and Ministerial expectations are
taken seriously and acted upon. Unfortunately, this has not been
forthcoming as a result of voluntary self-regulation.
The evidence collated by our a number of our member
organisations, together with the results of the joint survey commissioned
by IPC and BBPA and carried out by CGA are a damning indictment.
They show that, despite unprecedented political pressure, the
BBPA and the major national pub companies have not delivered sufficiently
against the Committee's recommendations and political expectations.
Commitments given to the Committee have not been
delivered and even the modest promises set out in the Framework
Code remain unmet. Crucially, the national pub companies have
not built on the Framework Code's de minimus provisions in respect
of free of tie options, guest beer and AWP income.
Regrettably, the BII has not been given a wide enough
remit or sufficient resources to adequately address this. It lacks
the necessary authority to act as an effective check on behaviour
to secure a better outcome for tied lessees. Too many intractable
and serious issues remain outside the scope of the self-regulatory
mechanism. This remains a major weakness.
In giving evidence to the Select Committee in December
2009, the BBPA pledged to ensure that members "earned the
tie". Our evidence demonstrates that the national pub companies
have conspicuously failed to do so over the course of the past
year.
We therefore do not hesitate to conclude that voluntary
self-regulation has failed to deliver substantive and meaningful
reform. We therefore recommend that the Committee and Ministers
press ahead with the plan of action set out in May 2010—to
consult on putting a more robust industry Code on a Statutory
Footing. Tied lessees need a stronger Code which sets out minimum
legal obligations on contractual obligations. They need a more
effective Code which is capable of proactive policing and enforcement
and with access to independent redress when things go wrong.
Only a Statutory Code can deliver this by setting
out a clear, unambiguous and enforceable requirement for all national
pub companies with an estate of more than 500 pubs to provide
a free of tie option, accompanied by full market rent review,
and a guest beer option for tied tenants. Only then will the root
cause of the problems inherent in the commercial relationship—first
identified in 2004 by the Trade & Industry Select Committee—be
finally resolved.
SUBMISSION
1. The Independent Pub Confederation (IPC) welcomes
the opportunity to submit further evidence to the Business, Innovation
and Skills Select Committee as part of its ongoing investigation
and monitoring of the relationship between pub companies and their
lessees. As the voice of the publican, we are uniquely placed
to comment on the degree to which recent industry initiatives
and developments have addressed the concerns and recommendations
identified in the last parliament.
2. We are aware that many of the component organisations
which make up the IPC have also submitted evidence to the Committee
and these submissions are mutually supportive and reinforcing.
This short memorandum summarises the collective position of our
members on the issues identified by previous Committee report
and the most recent call for evidence.
Introduction and Overview
3. The IPC was established in October 2009 as
a direct result of the Committee's original report and industry
efforts to address its recommendations. Its creation is a direct
product of the inability and unwillingness of landlord representatives
to address the substantive commercial issues at the heart of political
concerns about the sector, or to significantly shift their policy
positions in response.
4. The IPC is an umbrella body, bringing together
all representative bodies and campaign groups representing publicans,
consumers and small brewers. Members of the IPC are the Association
of Licensed Multiple Retailers, the Federation of Small Businesses,
the Guild of Master Victuallers, the Fair Pint Campaign, Justice
for Licensees, Unite the Union, CAMRA and the Society of Independent
Brewers. The IPC's charter[16]
is also supported by the BII and the FLVA and we work closely
with those two bodies as part of their ongoing work on the Industry
Framework Code of Practice.
5. Between them, the national trade bodies of
the IPC represent around 20,000 publicans. Just under half of
these businesses will be operated under lease issued by pub company
or other industry landlord. Of these, three quarters will operate
with an exclusive purchasing agreement as part of the terms of
the lease.[17]
It is this component of our membership which we are seeking to
represent in our submission.
6. The previous Committee reports on the sector
were the culmination of an exhaustive inquiry process, examining
all aspect of public house ownership and building on the work
undertaken in 2004 by its predecessor. It outlined a series of
substantive political and competitive concerns about the relationship
between landlord and lessee—most particularly in respect
of the major pub companies—and presented the industry with
a series of challenges to address them or face regulatory intervention.
A clear expectation of action in four key areas—tying arrangements
and exclusive purchasing obligations, the rental valuation model,
the issuing and management of leases and dispute resolution—was
expressed not only by the Committee but also by Ministers.
7. The IPC supported and endorsed the Committee's
key findings and recommendations for action. Whilst we acknowledge
that limited action has been taken in some areas in light of the
Committee's reports—most notably by the Royal Institution
of Chartered Surveyors—they remain only a partial response
to the Report and have yet to effect a material change in the
commercial relationship between landlord and existing lessee.
Most significantly, the commitments and statements of intent given
by both the BBPA and the pub companies themselves to the Committee
in 2009 are not being translated down to day-to-day decisions
at the grassroots on rent setting and commercial negotiations.
Moreover, the policing and enforcement mechanisms established
to enforce them are not sufficiently robust enough to deter, detect
or prevent such behaviour.
8. We therefore do not believe that the actions
taken are sufficient to satisfy the Committee's and Ministers'
expectations as outlined in May 2010 nor to justify a step away
from the small number of specific regulatory interventions outlined
therein. As outlined in the IPC Charter, we believe such interventions
should be directed at those companies with a tied estate of more
than 500, to ensure that actions are taken against those causing
the problems in the market place.
9. In responding to this call for additional
evidence, we have sought to consider whether the Committee's recommendations
are still valid, the degrees to which they are addressed by recent
initiatives and we identify which issues remain outstanding. We
have concluded by identifying further steps which we believe must
be taken to address the Committee's legitimate concerns about
the plight of lessees.
RELATIONSHIP BETWEEN
THE BBPA AND
IPC
10. A limited relationship has been established
between the BBPA and IPC since the last inquiry. We have worked
hard to overcome the hostility and suspicion of many lessees in
order to create a channel for dialogue. This has, unfortunately,
been restricted by the BBPA to matters arising from the implementation
of the Framework Code of Practice.
11. Whilst only one formal joint meeting has
been held between the Framework Code signatories—BBPA, BII,
FLVA—to which IPC was invited,[18]
two subsequent meetings have been held at Secretariat level to
discuss collaboration on the industry survey in respect of Code
Compliance, commissioned jointly by the afore-mentioned groups
and carried out by CGA. The IPC was involved in the drafting of
questions and the scope and methodology behind the survey and
we had an opportunity to express views and reservations. Not all
of these were taken up, but it was a collaborative process. We
had, for example, recommended a wider survey base, an earlier
initial survey and more frequent follow up activity, together
with a more qualitative assessment.
12. The IPC has approached the relationship in
an open, frank and constructive fashion and sought to work collaboratively
as equal partners to help deliver a better outcome for our respective
me; acknowledged and applauded by the BII. This has not always
been matched by others and there is a marked reluctance to work
in genuine partnership; no further meetings have been held or
scheduled between the IPC and BBPA since Autumn 2010. Nonetheless
we hope that the successful publication of the first survey results
will encourage landlord representatives to view a dialogue with
the IPC more positively.[19]
13. The BBPA and landlord representatives also
remain unwilling to engage on broader issues and in particular
with IPC on the ALMR Annual Benchmarking Survey, as recommended
by the Committee in 2009 and 2010. In giving oral evidence to
the Committee, the BBPA disparaged the survey's methodology, scope
and coverage—without being aware of any of the detail behind
it—but also committed to supporting the establishment of
such a benchmarked database if their concerns could be met. The
IPC and ALMR have offered to share the Benchmarking Survey
with the BBPA and to work with them to refine the survey going
forward. The offer has been rejected and misunderstandings about
the nature of the survey persist. BBPA continue to assert that
it does not provide meaningful comparators because of the nature
of the benchmarked universe, but will do nothing to broaden its
scope.
Framework Code of Practice
14. The Committee's recommendations in 2009 and
the Ministers' response in 2010 made clear that the industry needed
to deliver significant and substantive reform. The only step taken
by the BBPA in response to the Committee's 2008-09 Report and
its 25 recommendations has been the revision of the Industry Framework
Code of Practice and the alignment of individual company codes
to meet these new obligations. The IPC has always maintained that,
whilst the new Code undoubtedly had the potential to benefit new
entrants coming into the industry, it was not substantive, robust
and comprehensive enough to act as a full and final solution to
the Committee's concerns; or to correct the serious imbalance
of power between the two parties to the agreement.
15. We remain of that opinion—we need
a stronger, more effective and crucially a truly enforceable Code—encompassing
the issues of primacy, free of tie and guest beer options and
other commercial matters currently absent—if we are to create
a sea change in the relationship between landlord and lessee and
effect a fairer sharing of the economic benefits arising from
the partnership.
16. The Committee's Report published in 2010
provides a comparison between the old Industry Framework Code—deemed
to be an inadequate response to the 2004 Trade & Industry
Select Committee Report—and the new. The scope of the two
Codes is similar, with no substantive additional areas included.
The revisions are limited to specifying the level of detail and
the precise information to be provided to lessees in order to
allow them to make more informed commercial decisions. As such,
it does little more than enshrine existing commercial practice
and the relevant law.
17. In our opinion, the Framework Code represents
minimum requirements rather than the best practice to which we
would expect professional trade bodies to aspire to. More importantly,
whilst the Framework Code goes some way to providing more information
for new lessees, it will leave the position of existing ones virtually
untouched, arguably creating two tiers of lease practice. Evidence
from the BBPA/IPC Survey on Code Compliance highlight this discrepancy.[20]
18. This has been a slow process for what is
relatively limited reform. It took almost a year to revise the
Framework Code and a further ten months to align the company codes.
In giving evidence to the Committee in December 2009, the Chief
Executive of the BBPA anticipated that "the majority of individual
codes will be fully implemented by June 2010".
In fact only two company Codes were accredited by that date and
it was October 2010 before Codes were being implemented.
19. We have previously submitted evidence to
the Committee on Code accreditation[21]
which highlights concerns about the ability of the BBPA and BII
to ensure company compliance with the Framework Code. At 1 October
2010—the deadline for Code implementation—just 44%
of BBPA members were fully compliant. A full year after companies
were required to have an accredited Code in place, a small minority
of BBPA members (we estimate 15% of qualifying member companies)
have yet to comply. No action has been taken against any company
for this as far as we are aware. The fact that these companies
only have a small leased estate is largely irrelevant, the BBPA
is unable to enforce commitments given on behalf of its members.
20. As we noted at the time, the Framework Code
only applies to BBPA members. Only one non-BBPA member has successfully
applied for Code accreditation. Information supplied by BIIBAS
about the overall percentage of the tenanted/leased estate covered
by an accredited Code suggests that around 14% of tenanted/leased
outlets remain outside this regulatory structure.
21. Leaving to one side the IPC's substantive
concerns about the paucity of Code obligations and content, we
remain concerned about the lack of effective enforcement of even
this limited obligation. OFT Guidance on industry codes makes
clear that a voluntary self-regulatory scheme can only be deemed
effective at regulating commercial behaviour if it is enforceable
by a trade body on all its members and covers all
the industry. This is not met in this context and the fact that
too many landlords and lessees remain outside the self-regulatory
structure is one reason why the IPC believes that statutory
backing remains required.
A more effective Code—Company Compliance
with the Framework
22. Notwithstanding the above analysis, the Codes
themselves are only as good as their content and implementation.
The best self-regulatory regime in the world is meaningless unless
those affected by it are aware of their rights and obligations,
are able to insist upon them and know where to go when things
go wrong. Only then can it act as a genuine deterrent against
malpractice or bad behaviour.
23. In giving evidence to the Committee in December
2009, the BBPA pledged that the new code would "improve transparency,
give better more complete information, more open rent reviews
and inexpensive access to redress in case of dispute". The
IPC and BBPA worked collaboratively on a survey of both new and
existing lessees designed to assess whether this was being delivered
in practice and progress towards it. The survey was carried out
by CGA on behalf of the parties and results were published in
May 2011.
24. Contrary to how this has been described in
the trade press and presented to some political audiences, it
was not designed as a satisfaction survey and was deliberately
restricted in scope to company compliance with the Framework Code
of Practice. It assessed whether Company Codes were being implemented—at
a very basic level had they been disseminated and were lessees
aware of them - and secondly whether the specific obligations
the Framework Code imposed on landlords in respect of provision
of information were actually being met.
25. Set out below are the specific obligations
the Framework Code imposes on all BBPA member companies in respect
of the provision of information, together with an analysis on
compliance derived from the survey results.[22]
The Framework Code clearly states that this "must
be followed to ensure sufficient information is provided to enable
the 'reasonably competent operator' to understand the nature of
the pub business being offered and how this will be embodied in
a tenancy or lease agreement".
Framework Code Obligation
Information which must be provided
| New Lessees Survey | Existing Lessees Survey
|
| A full copy of Code to all new and existing lessees
| 9% not made aware of CoP
14% did not receive from company
| 24% not made aware of CoP
33% did not receive from company
|
| The range of different business opportunities offered
| 23% did not understand the range of options available to them
30% said they were well explained
| 24% said they were well explained |
| Initial heads of terms and copy of lease before agreement signed
| 18% did not receive | |
| Shadow profit and loss account | 20% did not receive
| 50% not given when changes to agreement offered
|
| Trading history | 17% did not receive
| |
| Companies will ensure that the prospective lessee is aware of the basis of the rental assessment (FMT)
| 10% said it was not clearly explained |
|
Unless these specific provisions are complied with in full, the
imbalanced relationship identified by TISC and BISC will persist.
26. Whilst the new Codes apply equally to new and existing
lessees, it is clear that greater effort has been directed at
ensuring that adequate information is provided to new entrants
to the market. It is worth noting in this context that the number
of new entrants post June 2010 is relatively small. In conducting
the survey, BBPA member companies provided CGA with the contact
details of all those taking out a new lease subsequent to the
Framework Code taking effect: responses were received from 60
new lessees but the total universe is not much larger. Given this,
and the degree of scrutiny these companies are under, whilst the
compliance rates are reasonably high it is perhaps surprising
that they are not closer to 100%.
27. In 2004, Morgan Stanley carried out a survey of lessees
in which a quarter rated their pub company as less than satisfactory
for how well they explained the lease terms. The survey carried
out by CGA on behalf of the IPC and BBPA shows little change in
2011: 23% of new entrants still did not understand the options
presented to them and 30% did not think the terms had been well
explained well. The lack of progress is more stark for existing
lessees, with just a quarter saying their pub company had done
a good job in explaining terms to them.
28. There is simply no excuse for failing to provide lessees,
particularly existing ones, with the information they need in
order to make an informed commercial decision. As noted in previous
inquiries, "pub companies have a responsibility not to exploit
their position of economic strength"[23]
and the provision of clear and detailed information is critical
to that.
29. The other key change introduced in the revised Framework
Code was the imposition of certain obligation on prospective lessees.
This was designed to ensure that they were properly equipped with
business, professional and industry advice in order to understand
the information and terms being offered to them; the clear implication
was that the pub companies had a greater duty of care to ensure
not only that information was provided but that they took steps
to ensure that it was understood. The above analysis suggests
that there is a considerably lack of clarity surrounding the information
being provided and that more can and should be done to ensure
informed decisions are taken.
30. More worryingly, the survey also suggests that new mechanisms
put in place in order to ensure prospective lessees are equipped
to take commercial decisions are being side-stepped. The Framework
Code requires pub companies to take steps to ensure that prospective
lessees have adequate business and professional advice. Before
being offered an agreement, a prospective lessee must
provide evidence of having obtained accredited pre-entry training
(PEAT) and having taken proper independent professional and business
advice. This obligation is capable of being waived but should
only be done so in exceptional circumstances.
31. The survey shows that take up of PEAT is by no means comprehensive.
Over a fifth of all new lessees were not required to under-go
pre-entry training, but only 3% had this requirement formally
waived. Presumably the remainder should have obtained training
and could have benefited from it. The fact that a significant
proportion of new lessees still did not understand their obligations
reinforces this and suggests that the waiver is not being rigorously
applied.
32. Leaving aside the question of the waiver, it is a matter
of some concern that almost all (98%) of those required to take
pre-entry training were not required to do so before they signed
the lease. As the Framework Code makes clear, pre-entry training
is explicitly designed to equip prospective lessees with the skills
they need to "evaluate and understand the contract they are
seeking to enter into". IPC members worked with BII on PEAT
on the understanding that the training would be given at the appropriate
time. There is simply no point in undertaking this training after
the event.
33. Similarly, in respect of professional advice, half of
new lessees were not asked to provide evidence of having taken
professional advice despite only 3% having formally had this requirement
waived. In 18% of cases, the pub company did not even advise the
lessee to take professional advice before entering into the agreement.
34. The Committee's recommendations from 2010 on this issue
are illuminating. Welcoming the two new clauses on training and
professional advice, the report nevertheless warned that "it
is vital that both of these clauses are applied rigorously".
The survey evidence suggests that this is far from the case. The
report went on to state that the Committee "expect[s] the
BBPA to introduce a system to monitor use of the waiver and publish
clear guidelines on its use by the end of August 2010". We
are not aware of any such guidelines.
35. This may in part explain why, despite two exhaustive inquiries
and a industry efforts to address this at the highest level, almost
a quarter of new lessees still did not understand the options
being presented to them and fewer than a third felt that they
were well explained. Put simply, the most basic Code provisions
are not being adequately implemented.
36. The survey evidence is indicative of a wider concern that
whilst checks and balances have been built into the self-regulatory
system—training requirements, external independent guidance
etc—these are not being rigorously or routinely followed.
At best lip service is being paid to elements of the Code and
at worst its provisions are being ignored. The survey also suggests
that the existing policing and enforcement mechanisms are inadequate
and this is expanded upon in sections 54-78 below.
37. For this reason, we continue to believe that statutory
backing will be required to deliver meaningful reform and to ensure
robust compliance.
A Stronger Code - Company Codes of Practice
38. Both the Committee and Ministers made clear to the pub
companies in 2010 that the limited scope of the BBPA Framework
Code alone was insufficient to address the clear political concerns
about the industry. Describing it as a "modest step",
the Committee stated "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".
39. Despite this, we are not aware of any company Code which
has introduced new, innovative additional clauses over and above
the areas outlined in the Framework Code. The substantive points
of difference between individual codes and the Framework Code
itself and indeed between different company codes relate to the
treatment of commercial matters such as the nature of the tie,
any purchasing obligations, the treatment of AWP income and company
policy on dispute resolution. The revised Framework Code requires
pub companies to make their policy clear on certain commercial
matters but falls short of requiring explicit commitments in these
key areas. We would argue that doing so does not build on the
Framework Code but simply sets out how the company intends to
implement them.
40. The acid test, it would seem is that set out by the previous
Government in response to the Committee's Report—namely
whether the major pub companies are offering a genuine free of
tie option, accompanied by an open market rent review, and a guest
beer provision. The IPC Manifesto and Charter also recommended
that action in these areas be taken by companies with more than
500 pubs.
41. Free of Tie: We are not aware of any pub company
currently offering a free of tie option as set out by the Committee
or the Government. Nor are we aware of any new lease agreements
being trialled which are genuinely free of tie with an open market
rent review, capable of independent determination if the parties
cannot agree.
42. Several companies, including Punch are offering
free of tie pricing options—not free of tie
agreements. These are closer to discount schemes than a genuine
free of tie option, requiring as they do the lessee to purchase
all product from the pub company at a range of prices set by the
company. In practice, these new agreements start from the basis
of a fully tied rent and allow the lessee to "buy" greater
discounts or exemptions from the exclusive purchasing arrangements
in return for a higher dry rent. The amount of discount available
depends on the nature of the lessee—multiple lessees with
greater purchasing power will attract higher discounts. These
new agreements are not accompanied by a full open market rent
review, however.
43. Enterprise's stated free of tie option is simply an annual
tie release fee. Again, the starting point is a fully tied rent
and the lessee then pays a substantial annual charge to secure
better payment terms. In discussions held with operators, Enterprise
have been overt that the discount lost to the pubco as a result
of this scheme will be exchanged directly for an increase in dry
rent.
44. A few smaller companies are offering free of tie agreements,
allowing the tenant to acquire products from any alternative supplier,
but without any fundamental rent revaluation. The arrangements
that we are aware of are temporary—in Marston's case only
three years in length—are not enshrined in the lease or
by deed of variation. These agreements fall outside the scope
of the Landlord and Tenant Act 1954 and hence there is not statutory
right to renew or security of tenure. In some cases, they are
only offered in return for an unsupported increase in rent—in
effect an annual tie release fee.
45. In all of the above cases, free of tie pricing is not
an option which can be included into existing leases. The option
may be requested but in order to exercise it, a lessee is required
to change to an entirely new agreement. These new agreements often
have different lease terms or more onerous provisions eg automatic
inflationary rent increases, minimum purchasing obligations, open
book accounting. These additional variables often deter lessees
from taking up the option. IPC sees no reason why free of tie
or free of tie pricing options could not be offered in the form
of a deed of variation to existing leases.
46. The survey of existing and new lessees carried out by
CGA for the BBPA and IPC provides some interesting insights on
the degree to which company codes build on the Framework Code's
provision in this area. It should be noted that survey questions
in this area referred explicitly and only to free of tie pricing
not general free of tie options. Whilst there is widespread awareness
of the existence of free of tie pricing options in the market
place, this was not supported by pub company practice. Whilst
three quarters of lessees were aware of free of tie pricing options,
only a fifth had been offered them by their pub company. The survey
of existing and new lessees carried out by CGA for the BBPA and
IPC provides some interesting insights on the degree to which
company codes build on the Framework Code's provision in this
area. It should be noted that survey questions in this area referred
explicitly and only to free of tie pricing not general free of
tie options. Whilst there is widespread awareness of the existence
of free of tie pricing options in the market place, this was not
supported by pub company practice. Whilst three quarters of lessees
were aware of free of tie pricing options, only a fifth had been
offered them by their pub company. "None of those offered
a free of tie pricing option had taken it up because of the significant
increased financial risk it posed to their business".
47. Evidence from IPC members suggests that discount levels
generally have improved but remain below that available to a free
of tie operator.
48. A voluntary self-regulatory approach has failed to deliver
genuine reform in this area. We continue to believe that giving
tenants and lessees a choice of agreements is the best way to
deliver this on an incremental and sustainable basis. The existence
of free of tie options introduces an element of healthy competition
and remains the most effective way of policing the commercial
relationship and pub company behaviour.
49. Guest Beer: Far less progress appears to have been
made in respect of a guest beer option. The survey results suggest
that 89% of new lessees were not given a free of tie guest beer
option in their current price list. This suggests that guest beers
are neither widely nor routinely made available.
50. The existence of guest beer rights provides a valuable
route to market for smaller, independent brewer and improved consumer
choice.
51. AWP income: The final area where companies could
have built on the de minimus provisions of the Framework Code
relates to AWP Rent. Here, the Framework Code obliges companies
to make clear that, "where AWP machines are tied, and the
income is shared, such income will not be included in the 'divisible
balance'". The 2010 BISC Report called this a "belated
step in the right direction" but noted that the lessee's
machine income should never have been rentalised in the first
place. The 2004 TISC and 2009 BISC recommendation that the AWP
tie should be removed was repeated and pub companies were urged
to offer free of tie options.
52. The survey of lessees reveals a picture of little change.
In the case of new lessees entering the market after June 2010,
just under half (45%) were still tied for machines. This is a
similar proportion to tied/untied machines as in the existing
lessee estate and is comparable to that reported in the ALMR
Benchmarking Report. This suggests that no new steps have been
taken to offer free of tie options.
53. Moreover, there is considerable confusion about the treatment
of machine income. In respect of new lessees—who were supposed
to have had their agreement terms clearly set out for them, with
full transparency—15% said that machine income had not been
removed from the divisible balance but over 70% were not sure
how their machine income was being treated. In the case of existing
lessees, just 22% had definitely had the income correctly removed
from the divisible balance.
54. The confusion may well have arisen as a result of a discrepancy
between the public comments and commitments given by BBPA in giving
evidence to BISC in 2009 and the way in which the matter is being
applied in practice. In giving evidence, the BBPA stated that
"the AWP tie will be dealt with below the balance, in other
words the income is shared only once" ie the 50/50 share
of the machine income. They anticipated that this would result
in a net gain to a lessee with a £2,500 AWP income of £1,250.
55. What has happened in practice in respect of three of the
major pub companies is that the machine income has been physically
removed from the divisible balance but is still taken into account
in the preparation of a rental bid. Reference to lessee machine
income is now made below the divisible balance, after the FMT
calculation has been concluded. As a result, lessee machine income
is still rentalised. In all cases seen by IPC and its members,
this has resulted in no gain to the lessee; in some rent reviews
it has resulted in a net loss.
56. These matters have been referred to BIIBAS and, whilst
acknowledging that this is against the spirit of the commitments
given to the Committee in 2009 has been found not to be in technical
breach of the Code of Practice. This is because the Framework
Code does not prevent pub companies from rentalising a tied lessee's
machine income nor does it require the company to make clear where
this calculation will be made in the rental assessment; it merely
requires the company to make clear that it is not included in
the divisible balance and tacitly accepts that such income will
be shared.
57. Leaving aside the inherent weakness that this exposes
in the self-regulatory enforcement mechanism, the treatment of
AWP income in practice demonstrates how little real and meaningful
attitudinal reform has taken place despite repeated political
criticism. The fact that machine income would now only be shared
once was presented as a major concession on the part of the pub
companies and the only one which would result in a direct financial
benefit to tied lessees. It has yet to be delivered.
58. In giving evidence to the Committee in 2009, the BBPA
said that pub companies had to "earn the tie". The limited
evidence of reform provided by the survey of new and existing
lessees in these three key areas—free of tie options, guest
beer and AWP reform—suggests that they have yet to do so.
For this reason, we continue to believe that explicit clauses
and requirements for national pub companies to offer a free of
tie option, accompanied by a full market rent review, and a guest
beer option for tied tenants should be included in a Statutory
Code. A simple requirement to "make clear" company policy
in these areas has proved insufficient to drive real change in
the market.
A MORE ENFORCEABLE
CODE—RENTAL
VALUATION GUIDANCE
59. The Framework Code should help to ensure problems of past
are not repeated in future, that the starting rent for a premises
is based on evidence rather than assumption and that the FMT calculation
is clearer and hopefully fairer. This is, however, dependent on
the RICS revised valuation guidance being adopted in full by the
pub companies.
60. It is to the credit of the RICS that they took immediate
action to address the Committee's concerns arising from the 2009
Report and particularly the decision to involve non-RICS members
and lessee representatives in the redrafting of the guidance.
Whilst redrafting was a complex and lengthy process of healthy
debate, we believe that the new paper is much clearer and that,
whilst the phrase "the tied tenant should be no worse off
than the free of tie tenant" is not explicitly included,
the general principle is addressed. The RICS has confirmed that
a correct and full application of the guidance in rent setting
and review should achieve that result.
61. We remain concerned, however that attempts to misinterpret
or manipulate the guidance may still occur and are reassured that
the RICS will keep it under active review. We would urge the Institution
to upgrade the status of the paper to a full Guidance Note to
prevent any backsliding.
62. For example, the introduction of new agreements with no
rent review clauses but annual inflationary increases instead
effectively circumvents the new RICS guidance. More alarmingly,
we have also seen the reintroduction of Minimum Purchasing Obligations—last
used in the 1990s—which require the lessee to purchase a
fixed amount of tied products every year, and penalise them on
failure. This appears to be an attempt to offset lost income arising
from a more realistic valuation process. The survey of lessees
carried out by CGA on behalf of the BBPA and IPC found that in
half of all cases, discretionary financial or business support
had been accompanied by changes to the agreement, in particular
the introduction of annual inflationary increases.
63. Experience of the new guidance on the ground is limited,
but we are already seeing evidence of systematic non-recognition
of its provisions. Evidence provided by ALMR members at
rent review suggests that BDMs are still over-estimating the turnover
the unit can realistically sustain and significantly under-estimating
the costs of doing business; this produces an over-inflated rent
and results in an imbalanced share being taken by the pub company.
The survey of lessees suggests that of the 9% of existing lessees
offered changes to their current arrangements, only half received
a shadow p&l and the necessary information to make an informed
commercial decision. This is directly counter to guidance and
the Code.
64. The fact that cases are still being referred to PIRRS
on a regular basis, despite the existence of the new guidance
suggests that it is not yet having a material impact on commercial
behaviour. The BII reports that 27 cases have been referred to
PIRRS over the past year—78% of these from one pub company
alone—with only seven of those being resolved satisfactorily.
Moreover, the fact that PIRRS is a closed process limits its effectiveness
for driving reform more generally. Arbitration outcomes are shared
and may be referenced in subsequent rent reviews, acting as a
check on landlord behaviour.
65. Equally the high levels of dissatisfaction at rent review
outcomes reported by existing lessees through the BBPA/IPC Survey
suggests that RICS guidance is not being routinely implemented.
Almost two thirds of existing lessees said that their most recent
rent review was not resolved satisfactorily. The survey also highlighted
the fact that few lessees were aware of what to do in these circumstances—56%
new entrants were not aware of the PIRRS scheme and, more worryingly,
58% existing lessees were also unaware of it. This suggests that
the number of cases referred to PIRRS may not be an accurate picture.
66. Few if any BDMs are chartered surveyors and therefore
not bound by the guidance. Indeed, few are even aware of its existence
and none have been trained on its revisions and their implications.
In other rent cases there has been an apparent refusal by some
to follow guidance. As previously noted BIIBAS is incapable of
addressing these issues as the Code does not commit companies
to abide by the guidance. It is vital, therefore, that the Framework
Code and company codes are revised to make explicit the commitment
given in mediation and to the Committee to implement RICS Guidance
in full.
67. Policing of the codes to ensure mandatory compliance with
RICS guidance is also required to effect meaningful change. Until
we have a comprehensive statutory code capable of independent
redress—as recommended by the RICS Forum—no one has
any powers over BDMs and Area managers choosing to ignore rental
guidance and to enforce a more evidence based approach to rent
setting.
An enforceable Code
68. A focus of the 2009 follow-up inquiry related to the enforceability
of the Codes—both whether the pub companies themselves would
observe them in practice and self-regulate and whether the mechanisms
put in place by the BII were robust enough to police them if they
failed to do so. From the IPC's perspective, the question of whether
there are meaningful sanctions in place to act as effective deterrent
and penalty are critical to this. We consider each element in
turn.
69. The evidence from the BBPA/IPC Survey suggests that there
is widespread failure to observe the Framework and company code
requirements at a grassroots level. This is endorsed by the anecdotal
evidence from operators within IPC membership arising from rent
review negotiations where Framework Code provisions are often
disregarded. Further information is provided in section xx below.
70. What is clear is that the widespread non-observance of
Code provisions is not yet being translated into complaints to
BIIBAS and, in the case of rent negotiations, to PIRRS. This may
be attributed in part to the fact that these regulatory mechanisms
are passive—they respond to complaints rather than actively
policing and carrying out spot checks on compliance—and
also to the fact that lessees are encouraged to exhaust all internal
procedures first.
71. The most effective self-regulatory regime in the world
is meaningless, however, if those it is designed to protect are
unaware both that it exists and how to use it. The fact that not
even all new lessees, let alone existing ones, are aware of the
company codes and understand their provisions is telling in this
respect. Moreover, whilst the lessee survey suggests that pub
companies have made lessees aware of the obligations the codes
impose upon them in respect of assignments, there has been a failure
to communicate the mechanisms for dispute resolution, with more
than half of those surveyed unaware of their existence. This is
likely to further dampen the number of complaints made about Code
breaches.
72. Turning to consider the effectiveness of the BII in monitoring
and policing the Codes, the picture is mixed. The information
provided on the BIIBAS website is limited and relates only to
confirmed breaches of the Code; it does not record all queries
referred to BIIBAS nor does it record all those cases deemed serious
or substantive enough to warrant a full investigation. Equally,
no public record is made of those issues which are serious enough
to result in a complaint but which are deemed to fall outside
the scope of the Code. Nonetheless, the website does reveal that
there have been five confirmed code breaches in the seven months
since the Codes were fully implemented, all relating to major
pub companies; this is not insignificant in the light of the evidence
provided by the lessee survey.
73. We understand from BIIBAS that there have been five times
as many cases referred to them warranting serious investigation;
of these five related to old codes. During 2009, the BII received
eight formal allegations of Code breaches under the old regime
with half being upheld as breaches. There is, therefore, limited
evidence that the new, more robust regulatory mechanism is working
more effectively to address instances of bad practice. Equally
the number of allegations has increased significantly despite
the new codes but it is difficult to draw any meaningful conclusions
given the lack of awareness of dispute resolution mechanisms evidenced
by the survey of lessees.
74. Of those allegations received under the new codes where
BIIBAS has reached a conclusion, 41% were upheld as breaches.
These figures would undoubtedly been higher if the codes had been
fully implemented when further allegations of bad practice were
made to the BII. This suggests that the self-regulatory mechanism
works well where it is capable of being engaged, but that it is
still too limited in scope to root out bad practice.
75. Moreover, many instances of malpractice are deemed to
fall outside the scope of the Code and BIIBAS and hence go unresolved.
This is exemplified by reference to the Framework Code commitment
on AWP income and also the implementation of the RICS guidelines.
Cases where machine income has been removed from the divisible
balance but still rentalised have been referred to BIIBAS by IPC
members as have instances where RICS Guidance has been ignored
and no reference made to benchmarked costs. None of these have
been recorded as breaches—despite being outside the spirit
of the code—because the Framework Code does not oblige companies
to act in a particular way in these cases; it simply requires
them to be open and transparent. Equally, the only explicit reference
to RICS Guidance relates to the disregarding of goodwill.
76. In our opinion, this remains the major weakness of the
BIIBAS regime. The accreditation process is not a badge of quality
or fairness but rather an assessment of transparency and whether
it meets the minimum requirements of the Framework Code. Crucially,
it cannot be used to press for amendments to Company Codes to
press for better treatment or more action in line with Committee
recommendations. Enforcement is therefore similarly limited to
those clear cut issues as measured by the lessee survey. As a
result, commercial behaviour which had been castigated by the
Committee is not even characterised as a minor breach of the Code
and can continue unchecked.
77. There is, therefore, no qualitative assessment of fairness
in the process and therefore no assumptions can be made in this
regard from the BIIBAS statistics.
78. Finally, the absence of any meaningful commercial sanction
means that, however professional and rigorous the BIIBAS compliance
regime may be, the system as a whole is largely toothless. The
lack of a deterrent means that there is no voluntary check on
company behaviour to ensure observation and no mechanism for penalising
a breach. Sanctions are only applied to companies who have multiple
unresolved Code breaches recorded against them. Even then, the
only deterrent is a loss of BII accreditation.
79. As noted previously, no BBPA member has had their membership
suspended for failing to comply with the BBPA accreditation process.
Pub companies who do not have an accredited Code in place or are
not BBPA members are still able to attract lessees. This suggests
that the only sanction available to BII and BBPA—withdrawal
of accreditation and membership—is ineffectual.
80. In giving evidence to the Committee in 2009, the BBPA
argued that the withdrawal of accreditation and membership would
be a meaningful sanction because, under the new system of codes,
pub companies would compete for tenants by offering them the best
range of options and through the naming and shaming of companies
with breaches recorded against them. They also undertook to promote
the benefits of choosing an accredited pub company or BPPA member
company to prospective lessees.
81. This may act as a sanction if it was capable of resulting
in a real financial or commercial detriment to the company, however,
the survey of lessees reveals that only a minority of lessees
consider other pub companies; most lessees still choose a pub
irrespective of landlord and therefore irrespective of a landlord's
reputation in the market. If there is no bottom up demand for
pub companies to compete for lessees, then it matters little whether
the landlord has five or 50 complaints against them. We are unaware
of any proactive publicity being undertaken by BBPA or BII in
this regard, nor indeed in publicising allegations, investigations
and conclusions.
82. It is clear that there is a real communication gap relating
to dispute resolution which is hindering the effective policing
and enforcement of the Codes and which must be addressed as a
matter of urgency.
83. For this reason, we continue to endorse the recommendation
of the RICS Forum that there should be separate, independent mechanism
for redress and which can look at aspects of the dispute resolution
regime as a whole—BIIBAS, PIRRS, internal dispute resolution
and BII mediation. We further believe that the self-regulatory
mechanisms established by the BII should be strengthened through
the inclusion of public interest representatives to give a greater
sense of impartiality and activity directed at more towards proactive
monitoring and policing of the Codes through assessment and spot
checks, in line with OFT recommendations on consumer codes. It
is clear from the results of the lessee survey that a system which
relies on complaints is not sufficient to identify and address
all breaches or instances of bad practice.
DISPUTE RESOLUTION
84. A major criticism of the sector—outstanding since
2004—is the absence of an effective dispute resolution mechanism.
The situation has changed little since the initial TISC inquiry:
a lessee must still exhaust all internal dispute resolution mechanisms
before a complaint or concern can be referred to an external arbiter.
The revised Framework Code only makes one change—to allow
complaints to be referred about a pub company to be referred to
the BII rather than the BBPA.
85. This seems to be more apparent than real given the very
limited activity which has been directed towards effectively communicating
the existence of dispute resolution mechanisms to lessees. The
survey of lessees carried out by the BBPA and IPC reveals just
under half of all lessees are unaware of internal dispute resolution
procedures (48% of new entrants and 44% of existing lessees) and
just over half (53%) are unaware of external dispute resolution
procedures ie through BII.
86. The need for more effective dispute resolution is evidenced
by the high number of calls received by lessee representatives
on matters outside the scope of BIIBAS and PIRRS which nevertheless
relate to leases and commercial relationships. The BII has reported
an increase in calls relating to lease and rental matters during
the first half of 2011, despite the implementation of the Codes.
The ALMR has received five times the call volume on these
matters compared to last year. This is reinforced by the need
for the BII to set up a new mediation service, which has attracted
four substantive cases in its first four months of operation.
87. The problem is not restricted to existing lessees, of
those new entrants surveyed by CGA, 13% were already in dispute
with their pub company, 7% had poor relations with their landlord
and 5% had a poor relationship with their BDM. The FSB survey
of its lessee members provides valuable additional insight into
operators' views on the Code and satisfaction. We endorse and
support its findings.
88. This suggests that the Code as currently drafted and enforced
is far from a full and final solution. The most intractable problems
relating to the commercial relationship—particularly those
affecting business viability such as dilapidations, AWP income,
operating costs—remains outside the scope of the Code. The
Code needs to be broadened to encompass these common areas of
dispute and a new independent redress mechanism established.
Industry Benchmarking Survey
89. The IPC supports the ALMR Benchmarking Survey and
deplores the failure to engage on this important issue by landlords
and their representatives. We endorse the representations made
by ALMR in respect of this issue and do not wish to comment
further except to note that evidence provided to ALMR by
Enterprise Inns in respect of over 700 of their lessees and collated
by Milestone, a firm of accountants, suggests that the ALMR
figures are robust, reliable and in line with the experiences
of their tenants.[24]
Given that this information is readily available to the company,
we have to question why they continue to use below average assumptions
in their rental calculations and why they are unwilling to include
this within the ALMR exercise in order to create a genuine
industry database.
CONCLUSION
90. The challenge to the industry set out by the Trade and
Industry Select Committee in 2004, the Business Enterprise and
Skills Committee in 2009 and the Business Innovation and Skills
Committee in 2010 was clear: to materially change the way in which
it was regulated and to improve the experience of thousands of
hard pressed lessees through greater openness and fairness in
their commercial relationship.
91. The evidence provided both through the experience of IPC
member organisations and the survey carried out by CGA on behalf
of both the IPC and the BBPA suggests that, whilst modest progress
has been made material, bottom line change has yet to materialise.
92. The acid test set out by the Committee in May 2010 has
failed to be met. The Framework Code has failed to deliver anything
more than minimum industry standards and the national pub companies
have not built on its de minimum provisions to deliver real and
substantive reform. Key issues remain outstanding. Guest beer
provisions have not been adequately implemented and the free of
tie option for lessees, accompanied by full market rent review,
is entirely absent.
93. We therefore have no hesitation in recommending that the
Committee and Ministers act in line with the action plan outlined
in May 2010—to consult on putting a more robust and effective,
revised Code on a statutory footing—with access to independent
redress—to root out bad practice once and for all, to act
as a genuine deterrent and to ensure enforcement across the industry.
In line with Ministerial recommendations, this new Code should
include a requirement on all national pub companies with an estate
of more than 500 pubs to offer a free of tie option to all lessees,
accompanied by a full market rent review, and a guest beer option
to all tied lessees. This one provision, above all else, would
almost certainly rebalance the relationship between landlord and
tenant and ensure that the tied model going forward is made both
more competitive and more viable.
EXECUTIVE SUMMARY
1. The Select Committee Recommendations and Government Response
to them were the result of exhaustive and comprehensive inquiries
and supported and endorsed by the IPC.
2. The challenge to the industry was clear—to put in
place a comprehensive Code of Practice and effective self-regulatory
structure; to demonstrate it was working effectively; and, for
the national pub companies, to build on its de minimus provisions
and offer a free of tie option with market rent review and a guest
beer option.
3. We do not believe that the actions taken to date are sufficient
to satisfy this test nor to justify a step away from the small
number of specific regulatory interventions pledged by Ministers
in May 2010. The competitive position of tied lessees remains
unaffected and urgent action is required to address it.
4. There is some evidence of slow process towards relatively
limited reform but compliance with the Framework Code is not comprehensive.
Put simply, the most basic Code provisions are not being adequately
implemented.
5. Just 44% of BBPA members had an accredited Code in place
by 1 October 2010. A year after the Code took effect, a small
minority of BBPA members have still to comply and around 14% of
the tenanted/leased estate remain outside the regulatory structure.
14% of new lessees and a third of existing lessees have not received
a copy of their company's Code. Given the degree of scrutiny these
companies are under, whilst the compliance rates are reasonably
high, it is surprising that they are not closer to 100%.
6. A survey carried out by CGA on behalf of BBPA, IPC, BII
and FLVA reveals lessees are still failing to get the information
required under the Framework Code to ensure that they are equipped
to make an informed commercial decision. There is simply no excuse
for this.
7. In 2004, Morgan Stanley found a quarter of lessees rating
their pub company as less than satisfactory for how well they
explained the lease terms. In 2011, CGA found that 30% of new
lessees did not think the terms had been well explained.
8. Code provisions on pre-entry training and business advice
are being routinely ignored and the waiver is not being rigorously
applied. One in five new lessees were not required to take pre
entry training, but only 3% had this requirement formally waived.
Of those taking part, 98% completed the course after they had
signed the lease.
9. At best lip service is being paid to elements of the Code
and at worst its provisions are being ignored. Existing policing
and enforcement mechanisms are inadequate to curb bad practice.
10. No pub company is currently offering a free of tie option
as set out by the Committee. Punch is offering free of tie pricing
options but these are based on a fully tied agreement with adjustments
being made dependent on the degree of discount offered. Enterprise
will only allow free of tie pricing where an annual and substantial
tie release fee is paid. In both cases, this is only available
on new agreements, not as a variation of an existing lease. These
are not delivering sufficient financial benefits to individual
lessees, and the ALMR Benchmarking Survey shows it is being
offset by increased rents.
11. A genuine free of tie option, accompanied by market rent
review will address concerns about the competitive pressures faced
by tied lessees. It will also act as a powerful mechanism to police
the commercial and contractual relationship and prevent the abuse
of power inherent in the current relationship.
12. Whilst three quarters of lessees were aware of free of
tie pricing options, only a fifth had been offered them by their
pub company. 89% of new lessees were not offered a guest beer
as part of their price list. A genuine guest beer option provides
a valuable route to market for small, independent brewers and
enhanced consumer choice.
13. 15% of new lessees and 78% of existing lessees said that
tied machine income had not been removed from their divisible
balance, in line with commitments given to the Committee by BBPA.
There is evidence amongst existing lessees that even where it
is, income is still being separately rentalised.
14. Revised RICS Guidance is clear and transparent but there
is no mechanism to ensure it is routinely applied. There is evidence
at rent review of systematic non-recognition of its provisions
and FMT calculations remain distorted. Two-thirds of lessees are
still dissatisfied with the outcome of their most recent rent
review.
15. The most effective self-regulatory regime in the world
is meaningless if those it is designed to protect are unaware
it exists and how to use it. A quarter of existing lessees are
unaware of the Code of Practice and over half are unaware of the
mechanisms for dispute resolution.
16. This impacts on its effectiveness, particularly since
it relies on complaints to ensure compliance. Moreover, the current
regulatory mechanism lacks the necessary authority and is too
limited in scope to root out bad practice and act as an effective
deterrent. The absence of any meaningful commercial sanction means
that, however professional and rigorous the BIIBAS compliance
regime, the system as a whole is largely toothless.
17. Many instances of malpractice and the most intractable
problems relating to the commercial relationship are deemed to
fall outside the scope of the Code and BIIBAS and go unresolved.
The voluntary self-regulatory approach has therefore conspicuously
failed to deliver anything more than minimum standards
18. The national pub companies have failed the acid test set
out by the Committee and Ministers in 2010. We therefore urge
the Government to press ahead with its proposals from May 2010:
consult on putting a revised Code on a statutory footing; to strengthen
the Code by including minimum obligations for national pub companies
with an estate of more than 500 pubs to offer a genuine free of
tie option with full market rent review and guest beer provision;
and to establish an effective and proactive enforcement regime,
with independent redress.
20 June 2011
16
A copy is attached at Appendix I-NOT PRINTED Back
17
ALMR Annual Benchmarking Report Back
18
Initial meeting held on 12 August and subsequent Secretariat discussions
in November and December Back
19
The Survey was published May 2011 at a joint presentation hosted
by the IPC and BBPA. Whilst the results were supposed to be released
to both parties simultaneously, the BBPA received the presentation
several days ahead of the IPC and published it unilaterally to
media and political audiences. Back
20
Full survey results are attached at Appendix II-NOT PRINTED Back
21
Attached again at Appendix III-NOT PRINTED Back
22
Appendix III-NOT PRINTED it should be noted, however, that the
sample sizes for both new and existing lessees are relatively
small (under 2% of the leased/tenanted estate). Coupled with the
compliance levels noted in paragraph xxx above, this suggests
that any extrapolation across the universe should be viewed with
caution. Back
23
TISC Report 2004. Back
24 See
Appendix IV-NOT PRINTED Back
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