Pub Companies - Business, Innovation and Skills Committee Contents


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 SurveyExisting 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 account20% did not receive 50% not given when changes to agreement offered
Trading history17% 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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Prepared 20 September 2011