Pub companies: Follow-to the Government Response

Written evidence submitted by the The Association of Licensed Multiple Retailers (ALMR)

Summary of key points from ALMR

The Association of Licensed Multiple Retailers (ALMR) welcomes the opportunity to submit further written evidence to the Committee as part of its ongoing inquiry into pub companies and following the publication of the Government’s response.

We are disappointed that the Government has chosen not to follow the Committee’s well-researched and evidenced recommendations. We are particularly concerned about the absence of any detailed timetable or mechanism for full implementation and consultation, ongoing monitoring by Government to ensure that these commitments are delivered and meaningful sanctions.

We note that the Government response refers throughout to industry commitments but these are in fact unilateral commitments offered by the BBPA. Our aspiration remains for a genuinely pan-industry regulatory framework and Code of Practice, which is drafted and agreed by all sides and which covers all landlords, not just BBPA members.

The proposals put forward by BBPA and endorsed by Government will clarify the legal status of the Industry Framework Code only in respect of new leases. We remain concerned, however, about the status of existing lessees and do not believe that the proposals put forward will significantly change their position from present.

It remains our view that the only way to make the Industry Code indisputably legally binding is to incorporate the Code into the lease by means of a Deed of Variation or alternatively revised clauses of the lease – making clear that these provisions will only stand as long as an exclusive purchase obligation is in place. We are also unclear about the status of company codes as it would appear from the proposals as currently drafted that legal remedy through the courts is specifically restricted to the Industry Framework Code.

The proposals relating to the establishment of a new conciliation and arbitration service have the potential to be helpful. However, we have heard PICAS referred to by Ministers as a ‘regulator’ – it is not. At best it is a mediation service but in the absence of effective sanctions and operational independence, it cannot be a regulator nor can it impose a solution on recalcitrant parties. In order to deliver the redress mechanism requested by the Select Committee in 2004, 2008, 2009 and 2011, PICAS will need to be properly constructed, with a clear remit and independent authority to act.

We welcome the recognition by the Minister that the relationship between landlord and lessee has not operated fairly in recent years and that there is now an urgent need to rebalance the risks and rewards inherent in the contractual relationship. We also welcome the recognition that the problems have arisen in respect of FRI leases, where this balance has been particularly distorted; we would emphasise, however, that that this imbalance arises irrespective of the length of the FRI lease. It is our view that, where possible, the Code should be strengthened for all pub agreements and that the number of additional controls for FRI leases should be genuinely exceptional and granted on the basis of the nature of the agreement

If the Framework Code is to become the legally binding document, then it is vital that it is comprehensively re-written to include specific, measureable commitments and expanded to include the more intransigent aspects of the relationship which continue cause the biggest problems. We are also extremely concerned that no timetable or proposed consultation/mediation mechanism for addressing these and other substantive commercial issues is included in the paper.

We are particularly concerned that the proposals make no reference to effective sanctions and penalties to give  a new self-regulatory regime teeth and to act as an effective deterrent. Re-accreditation is not a check of fairness of lease terms, nor is it a health check of compliance with the Codes’ provisions. We would very much welcome a regular health check but do not believe simple re-accreditation at three-yearly intervals will deliver this. The ALMR has

proposed a system of annual statements of compliance and spot checks to be directed at a random selection of lease negotiations and a review of rental valuation calculations within them.

2 December 2011

SUBMISSION

The Association of Licensed Multiple Retailers (ALMR) welcomes the opportunity to submit further written evidence to the Committee as part of its ongoing inquiry into pub companies and following the publication of the Government’s response.

We are disappointed that the Government has chosen not to follow the Committee’s well-researched and evidenced recommendations and a copy of our press comment is attached. Whilst we acknowledge that there may be different means to achieve the same ends, we do not believe that the compromise package of proposals offered by the BBPA is sufficient to deliver the meaningful reform the Committee concluded was overdue in the industry. We are particularly concerned about the absence of any detailed timetable or mechanism for full implementation and consultation, ongoing monitoring by Government to ensure that these commitments are delivered and meaningful sanctions.

We note that the Government response refers throughout to industry commitments but these are in fact unilateral commitments offered by the BBPA, not the industry as a whole. Our aspiration remains for a genuinely pan-industry regulatory framework and Code of Practice, which is drafted and agreed by all sides and which covers all landlords, not just BBPA members.

In its earlier evidence to the Committee, and in subsequent discussions with both the Department and BBPA, the ALMR made clear that substantive reform was required in four key areas – the legal status of the regulatory framework, code content, enforcement and compliance and independent redress. We were clear, however, that the success of these reforms would hinge on the content of the Code. We continue to believe that a strong regulatory framework in and of itself will not deliver meaningful reform if the Code of Practice remains weak and vague.

We are pleased that the Government has acknowledged the need for wholesale reform of the current self-regulatory model, and acknowledged that there are unfair practices within the industry which need to be addressed. We welcome the establishment of clear objectives for the industry by Government, namely:

· To make the Code indisputably legally binding

· To establish an independent arbitrator

· To rebalance the risk and reward in the commercial relationship

Based solely on the details provided in the Government response, we do not believe that the commitments volunteered by the BBPA are sufficient to satisfy these Ministerial objectives in full. The devil is in the detail of many of these proposals and the potential for reform is greatly dependent on the willingness of all sides of the industry to work together in a spirit of genuine consultation and a clear timetable for the delivery of substantive reform, particularly in respect of the balance of risk and reward.

Indisputably legally binding

The proposals put forward by BBPA and endorsed by Government will clarify the legal status of the Industry Framework Code – something which has been in dispute during the course of the most recent Select Committee and which is therefore helpful. The ALMR has consistently argued that the only way to make the commitments volunteered through a Code of Practice is to incorporate them in the lease. As far as we understand it, the proposals put forward by the BBPA will do this in respect of new leases.

We remain concerned, however, about the status of existing lessees and do not believe that the proposals put forward will significantly change their position from present. A collateral agreement does not materially affect the terms of the lease and in particular is not binding on successors in title. If a landlord were to sell on the property to another tied pub company who was not a signatory to the Framework Code or not a BBPA member, then the lessee would have no legal protection under the Code. For example, many lessees would have originally had leases with Scottish & Newcastle and been covered as such by the BBPA Code of Practice. Those pubs were sold to an industry property vehicle and subsequently passed to a management company. Whilst they still remain tied, they fall outside the scope of the Code of Practice and the lessees would be afforded no legal protection under the Framework Code as a result. Given the fact that the major pubcos have signalled that they will dispose of packages of pubs, this problem could re-emerge.

It remains our view that the only way to make the Industry Code indisputably legally binding is to incorporate the Code into the lease by means of a Deed of Variation or alternatively revised clauses of the lease – making clear that these provisions will only stand as long as an exclusive purchase obligation is in place. We continue to press for this to be offered to all existing lessees who want it to ensure that Ministerial expectations are satisfied.

We further note that the proposals relating to the legal status of codes only apply in respect of the minimum industry standards set out in the Industry Framework Code. We are unclear about the status of company codes – many of which will place more strenuous obligations on the pub companies and some of which will represent best practice. How are these to be enforced? How is compliance to be assessed? What is the mechanism for legal redress in respect of these obligations? It would appear from the proposals as currently drafted that legal remedy through the courts – which remains the only sanction – is specifically restricted to the Industry Framework Code.

Independent Arbitrator

The proposals relating to the establishment of a new conciliation and arbitration service have the potential to be helpful but too little information is provided to allow us to make a detailed assessment; and the Government is taking much on trust. We have heard PICAS referred to by Ministers as a ‘regulator’ – it is not. At best it is a mediation service but in the absence of effective sanctions and operational independence, it cannot be a regulator nor can it impose a solution on recalcitrant parties. This is a problem identified by BII in its earlier evidence to the Committee.

In order to deliver the redress mechanism requested by the Select Committee in 2004, 2008, 2009 and 2011, PICAS will need to be properly constructed, with a clear remit and independent authority to act – PICAS has the potential to be helpful. The ALMR is supportive of any development which builds on and strengthens the existing self-regulatory structure. Providing PICAS builds on what works well at present in terms of enforcement and compliance – BIIBAS complaint handling and investigation, BII mediation, informal and formal dispute resolution mechanisms – and is not imposed in place of any of those, then the ALMR cautiously welcomes it as a step towards addressing legitimate political and industry concerns; but only if it is accompanied by refinements in the following areas:

· It must be accompanied by a substantive strengthening of the Code – over and above what has been provisionally proposed to Ministers. It will also need to include timetables for the internal handling of complaints/disputes and penalties and sanctions for non-compliance.

· It must be accompanied by a strengthening of BIIBAS enforcement and compliance activity in line with BII and IPC recommendations to the Select Committee - a weakening or removal of activity and authority from BIIBAS is not acceptable. We do not believe it is tenable for BIIBAS to simply be operating on the basis of complaints or cases referred from PICAS and PIRRS. We also note that the cost of referring a case to PICAS may be prohibitive or off-putting to some lessees, therefore a cost free complaint mechanism, such as provided by BIIBAS, will be important.

· Best Practice in self-regulation suggests that an independent Chair and majority public interest representatives on the governing body would be helpful. The success of PICAS, and indeed PIRRS, will be dependent on the individuals involved picking up cases and challenging norms. They must have the independence and authority to act. PIRRS and PICAS Boards should have clear and separate remit

· Removal of accreditation is not an effective or ultimate sanction and provides no real deterrent at present. Given that there is a cost involved in referring a complaint/dispute to PICAS the ability to award costs and provide restitution to the tenant/lessee is important and is not referred to in the papers seen to date.

· No reference is made to the publication of cases and complaints referred to PICAS. This is another effective deterrent and should be explored as a matter of urgency

We accept and understand that much of this detail is to be determined in consultation. It is a source of regret that the full details were not shared with the PIRRS Board and all listed stakeholders before being submitted to Ministers.

Redressing the balance of risk and reward

We welcome the recognition by the Minister that the relationship between landlord and lessee has not operated fairly in recent years and that there is now an urgent need to rebalance the risks and rewards inherent in the contractual relationship. The ALMR has consistently stated that the tie per se is not the problem, but rather whether both sides enjoy a fair share of the economic benefits arising from the business.

We also welcome the recognition that the problems have arisen in respect of FRI leases, where this balance has been particularly distorted; we would emphasise, however, that that this imbalance arises irrespective of the length of the FRI lease. It is right, therefore, that measures to address this commercial imbalance are directed at FRI leases, but we would caution against a blanket approach. It would appear that the proposals in the Government’s response would see non-FRI leases and tenancies subject only to the existing Framework Code, not even benefitting from minor clarifications and tightening in the areas identified by BII/BIIBAS as matters of concern. It is our view that, where possible, the Code should be strengthened for all pub agreements and that the number of additional controls for FRI leases should be genuinely exceptional and granted on the basis of the nature of the agreement

Whilst we therefore welcome the recognition that the Industry Framework Code needs strengthening, we do not believe the initial BBPA proposals go far enough to achieve the Ministerial objective of rebalancing risk and reward. In our view revision should be substantive and urgently pursued. In our evidence to the Select Committee we made clear that many of the problems in respect of compliance were exacerbated by the poor drafting and the vague and woolly provisions of the Code and the paucity of the commitments given. If the Framework Code is to become the legally binding document, then it is vital that it is comprehensively re-written to include specific, measureable commitments and expanded to include the more intransigent aspects of the relationship which continue cause the biggest problems.

As a general comment we would note that many of the problems have arisen as a result of the Framework Code simply requiring companies to make their policies clear in certain areas – we had hoped that the Framework Code would move away from this approach and set clear requirements. Failure to do so will hamper lessees seeking legal redress through the courts and render meaningless efforts to make the Industry Code legally binding.

These unilateral proposals, whilst helpful clarifications and restatements of what had supposedly been committed to in 2009, do not in and of themselves substantively change the nature of the relationship. They can, therefore, only be a starting point for reform and ALMR would only be able to give them a cautious welcome in the context of broader, more substantive discussions. Our commentary on them is attached.

We note that BBPA is proposing a series of other areas which would be subject to discussion and consultation. These appear extremely vague and weak and the descriptions provided do not allow us to assess whether these would meet some or all of the ALMR´s concerns. We are also extremely concerned that no timetable or proposed consultation/mediation mechanism for addressing these and other substantive commercial issues is included in the paper.

We are surprised that the Government has provided no indicative timetable for this additional, substantive consultation process nor, indeed, what will happen if the industry cannot reach agreement on the nature and scope of this proposed package of reforms. The paper clearly states that initial reforms should be agreed and implemented by December 2011 but again no reference is made as to when the new arrangements will become effective nor what will happen if the BBPA fails to meet this timetable. The very short timeframe between publication of the response and implementation of the key provisions suggests that the proposed consultation with stakeholders will be short and perfunctory, rather than allowing for meaningful dialogue.

In summary, these proposals provide greater clarity and certainty in a number of key areas these but will not address our fundamental concern about FRI leases – namely the fair share of the commercial and economic benefit arising from the operation of the premises. An alternative mechanism for addressing such concerns or facilitating individual negotiations about the nature and degree of product ties and exclusive purchasing agreements, guest beer provisions etc will be required. As noted earlier, our belief is that the sooner we can move away from unilateral proposals submitted by one side towards joint working on a genuine industry solution, the better. We should be happy to work with other stakeholders to develop an alternative Code which better meets the concerns and aspirations of lessees

Sanctions and Enforcement

We are particularly concerned that the proposals make no reference to effective sanctions and penalties to give a new self-regulatory regime teeth and to act as an effective deterrent. The proposed changes do not go far enough in this direction. Indeed, lessees will be effectively penalised for making a complaint under the new charging regime for PICAS.

We welcome the proposals for a regular re-accreditation process but if the Industry Framework Code is to become incorporated into all agreements and capable of being relied upon by all, then it is questionable whether a regular if limited administrative process such as is proposed would deliver meaningful results.

We note that in the last Select Committee inquiry the accreditation process was not in doubt, it was company enforcement of Code requirements which was questioned and the BBPA/IPC Survey showed widespread non-compliance. This would not be addressed by reaccreditation. The accreditation process simply provides a check that the company code includes and correctly transcribes all the elements of the Industry Framework Code into company literature.

Re-accreditation is not a check of fairness of lease terms, nor is it a health check of compliance with the Codes’ provisions. We would very much welcome a regular health check but do not believe simple re-accreditation at three-yearly intervals will deliver this. Moreover, the proposals as drafted suggest a timeframe for the first health check of June 2016 – which we believe to be too far in advance – and would only apply to BBPA members and Greene King. We accept that commitments cannot be given on behalf of all operators, but question what would happen if a major landlord was to emerge outside this structure – or indeed resign their membership.

The ALMR has proposed a system of annual statements of compliance and spot checks to be directed at a random selection of lease negotiations and a review of rental valuation calculations within them. This proposal has been taken forward in part in the Government’s response, but it does not refer specifically to rental calculations. These changes will only be helpful if they are precisely drafted and directed.

Conclusion

We should be happy to provide additional information on any aspect of this submission or the Government’s proposal.

Commentary on BBPA Proposals for Code Reform

· Upward Only Rent Reviews – no change: this makes no change to the status quo. The existing Code states that UORR clauses in existing leases should not be enforced, but this is not binding on successors in title and, given the current state of the pub market, remains a matter of concern. Existing lessees want to see such clauses removed from their leases by Deed of Variation and at a reasonable cost. This should apply to all agreements, not just FRI

· Waiver policies – no change: this is simply a formalisation of what should be happening at present. The Framework Code should include clear commitments that companies should not initiate substantive discussions unless these are met and documentary evidence requirements met. This should apply to all agreements, not just FRI

· Timetable for pre-entry training – minor change to reflect existing good practice: the issue here is not the content of the code but its enforcement. The existing code already requires PEAT and professional advice, but the BBPA/IPC Survey showed it was not being enforced. This should apply to all agreements, not just FRI

· Timetable for information – minor change to reflect existing good practice: this is helpful in ensuring that prospective lessees and those approaching rent review have timely information; the degree to which this makes a material change will be dependent on the timetable proposed and changes being made to the information disclosure and justification requirements. We have proposed an industry standard P&L to assist in this.

· Insurance – semantic change only: the impact of this will be dependent on restrictions being placed on the unnecessary and unrealistic requirements imposed on like-for-like comparisons which mean claims of price matching are undermined. We have many examples of lessees being faced with impossible demand eg insurer to be Standard and Poor AAA rated, and all averaging clauses to be removed being particular hurdles. It is also common for clauses and cover values to be in excess of the norm. One of our members who tried to price match found that his preferred insurer was acceptable for the Church of England, but not the pub company. Any change in this area must be accompanied by a protocol on what is and is not a reasonable like for like requirement.

· AWP Machines – no change: this simply restates the existing requirements for Company Codes and does nothing to address the fundamental concerns raised by the Select Committee, BIIBAS and lessee groups. As an absolute minimum, the Framework Code must translate the clear commitments given by the BBPA to two successive Select Committees to only share machine income once. We have submitted alternative proposals to address this core issue of concern for lessees. Whilst we accept that more substantive change to this operation of the AWP tie may be limited to certain types of agreement, we are not clear why such a limited proposal for change should be restricted to FRI leases.

· RICS Guidance – no change: again, whilst this helpfully clarifies the existing Framework Code it is not a substantive change in policy or position. We welcome the requirement for all rent assessments to be signed off by an RICS qualified member. This will allow a separate and alternative disciplinary mechanism if the rent assessment is found not to follow Guidance. We note, however, that all the major pub companies stated at the Select Committee hearing in June 2011 that this was already practice. We are not sure why this need be limited to FRI leases only.

· Rents and complaints: these timetables should be included in the Framework Code. If the Framework Code is to be the primary and legally binding document which lessees can rely on it must be clear and specific, setting out industry minimum timetables which all are aware of. Again, we question why this should be limited to FRI leases

· Rents: we are not clear what is being proposed here which would be different to the existing wording of the Framework Code. This new commitment may have the potential to be helpful and to minimise the manipulation of rental valuation variables. We would need to understand what is intended and would be happy to work with industry partners to ensure that this delivered meaningful change. Our original proposals for reform were more specific in this area.

· Professional Advice – no change: we would need to see specific proposals to determine whether this would be a meaningful change as existing lessees are already required to take professional advice. The issue is not the wording of the Code but rather pub company enforcement of it and non-compliance identified by the BBPA/IPC Survey.

· Dilapidations – minor change to reflect existing good practice: it is important that a protocol on dilapidations and general exit processes be included in the Framework Code and this is not simply left to company codes as currently proposed. This does not go far enough to address lessee concerns and we have already tabled our own proposals for further reform

· BDM Training - minor change to reflect existing good practice: we support proposals to continuously invest in training and development of staff. Given the ALMR’s expertise in recognising and rewarding the best BDM through its Operations Managers Awards, we would welcome the opportunity to work with industry partners in this area

· Price lists – new code requirement: as this is a proposal put forward to ALMR we support it as a mechanism for delivering greater transparency and would welcome the opportunity to work with the BBPA and other industry stakeholders to develop it, but would not that it will only deliver meaningful change if accompanied by other measures.