Pub companies: Follow-to the Government Response

Written evidence from the Independent Pub Confederation (IPC)

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 were disappointed that this warning had not been heeded by the pub owning companies acting on their own inititive. We were further disappointed that the Government response published last Thursday (24th Nov 20011) reneged on their commitment to act appropriately. Rather than act upon the BIS Select Committee recommendations based, on overwhelming evidence, gathered over almost seven years, by two separate committees, after four hearings, the Government chose To work with the BBPA to develop alternative actions.

Given the complexities of the issues it is regrettable that IPC were not party to the negotiations prior to the response being issued.

Even the OFT’s 2009/10 Report on the sector found clear evidence that this was resulting in 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. The Governments response has done nothing to alter this environment.

Urgent action was required and promised 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 and is being permitted to escape if the Government "solution" is allowed to continue unaltered.

Despite unprecedented political pressure, the BBPA and the major national pub companies have not delivered sufficiently against the Committee’s recommendations and political expectations and we remain unconvinced that the Government response will promote the sufficient reforms expected.

The substantive commitments given to the Committee have never been delivered and even some of 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.

Without consultation with the expert and practical knowledge, embraced within the Independent Pub Confederation, Government has accepted a series of empty promises by the very parties found guilty of manipulation and neglect.

In giving evidence to the Select Committee in December 2009, the BBPA pledged to ensure that members "earned the tie". The Government response removes that pledge. A free of tie option with an open market rent ensures that any tied agreements are compared with a fair free of tie alternative and therefore, to be maintained the tied agreements themselves would have to at least be perceived equally fair by licensees. The tie would need to be earned by companies operating the model not forced upon their licensees.

Voluntary self-regulation has always failed to deliver substantive and meaningful reform in this sector. Tied licensees 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. It has always been maintained that this code can not be the creation of the parties who have been found to be acting improperly and should be industry agreed.

Only a Statutory Code can deliver this by setting out a clear, unambiguous and enforceable requirement for all pub owning companies with an estate of more than 500 pubs to provide a free of tie option, accompanied by an open market rent, 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. The Governments response destabilises an already fragile sector and we would urge the Committee and Government to consider our recommendations with a view to putting them into effect as soon as possible.

Simon Clarke

30 November 2011

EXECUTIVE SUMMARY

SUGGESTED RECOMMENDATIONS

· The proposal to rush through any code to be legally binding should be postponed until IPC have been consulted on content

· A free of tie option, with open market rent, capable of third party referral if the parties can not agree (subject to the 500 de minimus proviso outlined later)

· A guest beer right to be offered by all pub owning companies with more than 500 tied tenanted or leased pubs to tied licensees

· RICS guidance to be urgently reviewed to clarify interpretation

· Flow monitoring to be either prescribed if used to calculate fines or be supported by physical evidence

· The Industry Framework Code needs to be substantially strengthened

· Full cross party and industry participant consultation before a code is agreed

· The final industry agreed code to be made indisputably legally binding

· We understand codes will be applicable to all lease and tenancy agreements but that codes addressing leases will be subject to further provisions

· Total and unreserved removal of the AWP tie

1. INTRODUCTION

2. The Independent Pub Confederation (IPC) as one side of the industry's long standing dispute does not accept the Government response as a solution and were not party to it. The Governments implication that their response is an industry agreed one is factually inaccurate. IPC were not formally consulted as an umbrella body despite our requests.

3. We consider the Government response to be at best naïve and one sided as it fails at the first hurdle to resolve the issue of primacy, that being the rebalancing of risk and reward allowing licensees once more the opportunity to earn a decent living and build a profitable business.

4. The Independent Pub Confederation wholly endorse the BIS committees final report and recommendations.

5. Government should not be guided by the BBPA and they, and the industry in the future, need to be guided by a board representing all the industries interests. The BBPA have kept a tight grip on the steering wheel for too long and only through the select committee process has it been established, and apparently overlooked by Government, that they do not represent the industry and can not be trusted to self regulate effectively and to the satisfaction of the industry as a whole.

6. SUMMARY

· The Industry Framework Code needs to be substantially strengthened only after full cross party and industry participant consultation and then made legally binding

· A Pub Independent Conciliation Advisory Service (PICAS) to be set up to provide mediation and arbitration.

· A three-yearly re accreditation process for company Codes, achieved through examination of annual compliance reports and spot-checks – is a welcome development this must be undertaken by an independent body.

· A new independent Pubs Advisory Service (PAS) established to provide free advice to all prospective and current tenants and lessees is also a welcome development.

· SUGGESTED RECOMMENDATIONS

· The proposal to rush through any code to be legally binding should be postponed until IPC have been consulted on content

· A free of tie option, with open market rent, capable of third party referral if the parties can not agree (subject to the 500 de minimus proviso outlined later)

· A guest beer right to be offered by all pub owning companies with more than 500 tied tenanted or leased pubs to tied licensees

· RICS guidance to be urgently reviewed to clarify interpretation

· Flow monitoring to be either prescribed if used to calculate fines or be supported by physical evidence

· The Industry Framework Code needs to be substantially strengthened

· Full cross party and industry participant consultation

· The final industry agreed code to be made indisputably legally binding

· Total and unreserved removal of the AWP tie

7. BACKGROUND

8. Ed Davey and Vince Cable gave assurances to stick to the previous Government’s policy to relax the beer tie and to set a timetable to act if the industry did not reform itself. Those plans included a tie/non tie option, a guest beer option for those tenants that opt for a beer tie and that Government would monitor progress for one year and intervene to introduce a non-tie option and legislate for a Beer Order to allow guest beers if these flexibilities are not introduced.

9. The Liberal Democrats " Giving Pubs back to Communities’ 2010 manifesto, stated they would seek to introduce a statutory code of practice to uphold the principle that the tied tenant should be no worse off than if free of tie. A guest beer, and a genuine choice to opt out of the tie. (Appendix 1).

10. The Conservative Party gave similar assurances that they too supported the idea that should the industry fail to deliver self-regulation by June 2011, the Government of the day should end up consulting on putting the Code of Practice on a statutory basis.

11. Government committed to acting upon the Business Innovation and Skills Select Committee report and that if the committee so recommended, Government would consult on how to put an industry code on a statutory footing.

12. The BIS committee final report, published in September 2011, recommended the Government commence consultation for an industry code on a statutory footing.

13. Considering that Ministers clearly agreed to the plan put in place by BIS in March 2010, to legislate and rebalance the industry if the pubcos failed to reform, the subsequent response from the Government now sends entirely mixed messages, being a U turn on their previous commitments, policies and manifestos.

14. The Government have subsequently published their response having claimed to have met with the "industry". We consider it utterly inappropriate that Ministers have been negotiating with one side of this long standing dispute, and have not met with the majority of industry organisations about the content of the codes of practice. At no point were members of the licensee and consumer umbrella group Independent Pub Confederation permitted a meeting or the opportunity to contribute to the pre response consultation process, despite numerous requests.

15. We consider the proposal to legalise the BBPA's Framework code to be inappropriate as this is not an industry agreed code.

16. GOVERNMENT RESPONSE

17. THE TIE

18. The Government response indicates that there was no definitive evidence in the figures that would justify legislating to abolish the tie. The select committee final report makes no such recommendation and indeed abolition of the tie is not referred to as an option at all in their report. The Government response demonstrates that the Ministers, or those briefing them, have not read or understood the committee reports content. Only a free of tie, with open market rent, option has been requested and recommended and this suggested committee recommendation has been enshrined in the IPC manifesto as an acceptable compromise by the licensee and consumer group members.

19. What was recommended by the committee was that a free of tie option be offered to tied licensees. The purpose of this was to enable tied agreements to be kept "in check" as competitive and fair, effectively a self policing mechanism.

20. The tied model needs to be proven by those operating it that their agreements are competitive and that the benefits of the tied model outweigh its disadvantages, the principle of "countervailing benefits" and demonstrating that the tied licensee is not worse (or better off) than the free of tie licensee. The absence of IPC's suggested free of tie, with open market rent, option, and guest beer right, leaves tied product pricing open to abuse and manipulation and does not ensure that the tied licensee is no worse off than the free of tie licensee.

21. Recommendation

22. A free of tie option with open market rent review to be offered by pub owning companies with more than 500 tied tenanted/leased pubs (thereby excluding the small family brewers IFBB). It matters not that this would take time to implement, a clear commitment to its future implementation would be all that is necessary to renew faith in a beleaguered industry and put the maladministration of the tied model into an evolutionary process for the better.

23. A guest beer right to be offered by all pub owning companies with more than 500 tied tenanted or leased pubs to tied licensees, enabling wider consumer choice and licensees to react to customer demand.

24. RISK AND REWARD

25. On the basis of para 29 of the response – there is acknowledgement that a question remains relating to balance of risk and reward.

26. Given the response omits any action on tie reform it appears all opportunity to rebalance the risk and reward is dependent on appropriate and effective implementation of the Royal Institution of Chartered Surveyors rent assessment guidance.

27. ROYAL INSTITUTION OF CHARTERED SURVEYORS (RICS)

28. It is seen as a fundamental weakness in the Government response that so much now relies on the RICS guidance being correctly implemented given that the response concedes there remains a significant confusion around the interpretation of RICS guidance.

29. The following view of the RICS, before guidance was rewritten expressly stated that;

30. The Forum heard that there was some confusion in the interpretation of the guidance with the paper. For example in the treatment of the valuation of the wet rent, where it is clear to us that most lease agreements require a valuation largely on the terms of the lease. This follows the principle of the tied tenant being no worse off than the non tied tenant; a position which is arrived at with a correct interpretation of RICS guidance."

(Source - RICS Pub Industry Forum Report and Recommendations (Feb 2010))

31. " The guidance has since been rewritten and whilst we believe those on the drafting panel knew the meaning of what was agreed, confusion of interpretation still reigns, allowing manipulation. Ted Tuppen effectively demonstrated in the select committee witness hearings that his view and that of Rob May, the Enterprise Inns National Rent Controller, a participant of the RICS working group who redrafted the guidance, fundamentally differed from other working group participants including the IPC and BII representatives, Simon Clarke, David Morgan and Garry Mallen.

32. The IPC understanding of RICS guidance is that if undertaken correctly a rent assessment should result in a tied tenant being no worse (or better) off than the free of tie tenant. The valuation process should quantify the disadvantages of the tie and weigh them against the special commercial or financial advantages (SCORFA's) offered by companies operating the tied model. One of the SCORFA's is a lower rent, to counter inflated tied product prices, and it is the establishment of this rent assessment that needs to be the priority of RICS guidance, incapable of misinterpretation. The principle is that rent is reduced as tied prices increase and vice versa. The quantified cumulative effect of SCORFA's (including a lower rent) should be capable of balancing the quantified effect of higher tied product prices. The revised guidance, sadly, is denying this outcome due to misuse.

33. It is of little comfort that pub companies must adhere to RICS guidance if that guidance is so easily abused. It is imperative that areas of manipulation of RICS guidance are closed.

34. Recommendations

35. Government urge the RICS revisit their guidance as a matter of urgency and reword to ensure misinterpretation is avoided

36. All rent assessments, particularly rent review assessments, should be signed off by a RICS qualified individual.

37. THE NEW CODE

38. The industry code should be applicable to all agreements, for example, all licensees, tied or free of tie should be entitled to an open and transparent rent review negotiation. Pub companies operate various model agreements including brewery style tenancies and we understand these too would be covered by appropriate code provisions.

39. The industry mediation attempt proved that poor and inadequate code provisions will fail to deliver reform. The Government must recognise that the industry cannot police itself.

40. Recommendation

41. The final industry agreed code to be made legally binding BUT the proposal to rush through any code to be legally binding should be postponed until IPC have been consulted on content

42. Full cross party and industry participant consultation. IPC members to be consulted on code content, before codes are put on a legal footing

43. The Industry Framework Code needs to be substantially strengthened

44. FLOW MONITORING

45. The justification used by Government for not getting involved in the flow monitoring dispute, and responding to the Committee recommendations, is that they indicate flow monitoring equipment is not "in use for trade" as defined by section 7 of the Weights and Measures Act 1976. In its benign monitoring application it is accepted the equipment is not "in use for trade".

46. If the flow monitoring equipment is used for the calculation of fines it may be "in use for trade". Brulines themselves, in their Comprehensive Guide to Flow Monitoring, have confirmed this to be their understanding (page 10 2(f)) ;

47. ".....In regard to section 7, Brulines is confident that the commercial application of its equipment, as utilised by our customers and as described in this guide, is not "use for trade" i.e. measurements are not taken directly from the flow meter and applied as fines or levies. ...."

48. As evidence to the select committee demonstrates, some of Brulines clients do use measurements taken directly from flow meters and apply fines accordingly, thereby potentially using the equipment for a trade use by Brulines own admission. Evidence was submitted to the last committee that an estimate £10 million in fines were imposed last year alone.

49. It follows that equipment in a licensees cellar does not need to be prescribed until the point where an allegation and fine is imposed using measurements from that equipment.

50. Recommendation

51. The Government should confirm that, in circumstances where measurements are taken directly from the flow monitoring system, and applied as fines or levies, then the system should be prescribed or that, in accordance with the BIS select committee summary (2009-10), codes should include a requirement for additional evidence above and beyond the data from flow monitoring equipment in any accusation of buying outside of the tie. Additional evidence must be physical and not just a signed confession from the lessee.

52. CONCLUSIONS

53. The response proposed there should be immediate reforms to strengthen the Code by the end of 2011. The second stage is purported to be the more substantive issues , it is imperative a timetable is set for this and that meaningful consultation with IPC and other industry bodies is undertaken. An independent Government representative should be present at these consultations in order to report progress and areas of failed agreement.

54. The immediate reforms agreed between Government and BBPA need to be fully detailed before they are considered appropriate for the industry.

55. Ministers can not just expect this process to proceed without the prospect of Government intervention in the event of failure. It is uncertain how and whether the BBPA will deliver what it claims are concessions Government must retain a watching brief and there should be a review of progress after three months, with the prospect of a twelve month review if deemed necessary by those representing licensee and consumer interests.

56. Government committed to acting upon the Business Innovation and Skills Select Committee report and that if the committee so recommended, Government would consult on how to put an industry code on a statutory footing this must remain as a clear and present danger to those violating the system.

57. The industry does need stability and some anticipation of a secure future. IPC would envisage all pub owning companies will continue to convert estates over to managed houses, turn to short brewery style unprotected tenancies, with no right to renew, and continue their disposal for redevelopment programmes, none of which is helpful to reignite the sector or encourage investment. The right RICS guidance would mean fair, reasonable and competitive tied rents and with it renewed licensee profitability, this would encourage entrepreneurial flair and with it the reinvestment the Government seeks to achieve in their response.

APPENDIX 1

Liberal Democrat Pub Policy – General Election 2010

‘Giving Pubs back to Communities’

Liberal Democrat policies to support and save the British Pub

Introduction

The British pub is an important part of this country’s history and heritage. Pubs are more than just businesses; they are often the hub of the community as a focus for social, sporting and charitable activity. Pubs are a place for people to mix socially and so play an invaluable role in strengthening our communities and bringing people together.

The pub is crucial to our heritage, history and culture. Pubs sit at the heart of the British tourism industry with tourists and visitors to Britain making 13.2 million visits to our pubs each year. i The pub trade as a whole is also a major national industry which employs 540,000 people directly and 380,000 in associated trades. ii The pub also provides a sociable and controlled drinking environment which is therefore important in terms of encouraging responsible drinking.

Pubs up and down the country are being closed, for a variety of reasons, often when they don’t need to close, and more must be done to address this. Despite the evident decline in the pub industry the Labour Government has neglected to tackle these issues. We propose a series of measures to help reverse the trend and to support and preserve the Great British pub.

1. Minimum Pricing

he average price of a pint of beer sold in a pub is around £2.70.iii Supermarket deals undercut these prices with offers such as eight 275ml cans of beer for £4. This has caused a shift in alcohol consumption away from the controlled pub environment towards drinking at home or on the streets. We support a ban on below-cost selling, and are in favour of the principle of minimum pricing, subject to detailed work to establish how it could be used in tackling problems of irresponsible drinking.

2. Beer Duty

Beer is an iconic British drink, yet Labour’s introduction of the beer duty escalator has increased beer prices and made it harder for pubs to survive. Beer duty has increased by over 20% in only two years. iv High levels of beer duty make it more difficult for pubs to survive and increase the likelihood that people will drink at home. We will review the complex, ill-thought-through system of taxation for alcohol to ensure it tackles binge drinking without unfairly penalising responsible drinkers, pubs and important local industries. As part of this we will review the beer duty escalator and also believe that, through the EU, we should explore the possibility a preferential duty for draft beers which are more expensive to both serve and store, something that would help pubs.

3. Planning/Community Consultation

Currently the pub has very little protection in planning law allowing companies and developers to close pubs and redevelop them against the wishes of the local community who have very little say. This must change.

• Change of Use and Demolition (England and Wales)

Planning permission is not currently required to change a pub into a restaurant, shop or café and it remains legal to close a profitable pub overnight against the wishes of the community.

The community pub should be recognised in planning law by ensuring that any change of use or demolition is subject to the normal planning process. Every attempt for change of use for a pub should involve going through the planning process including a mandatory independent viability test, undertaken by the local authority. This would give local communities a say over the future of their pub and stop profitable pubs being closed.

• A right to buy

Where pub owners are seeking to sell pubs, the community and current lessee should have the opportunity to purchase the business as a going concern at fair market price.

• Restrictive Covenants

We would like to see a change in planning legislation which would end the use of Restrictive Covenants in the pub trade. These covenants prevent pubs from operating as pubs once they have been sold and should be outlawed.

• Sustainable Communities Act (England)

We will implement the Sustainable Communities Act Amendment Bill, which gives local communities the right to propose actions in their area to improve sustainability. This will ensure that the Sustainable Communities Act 2007 is an ongoing process that allows local people to continue to submit proposals to the Government, rather than a one-off process, and so will enable people to take action to protect their community pubs .

4. Reform of the ‘Beer Tie’

The operation of the beer tie by large pub companies can be unfair to tenants, harm consumers by inflating the price of a pint and cause pub closures. We would seek to reform the tie in the following ways to rebalance the relationship between the large pub companies and their licensees:

• A new independent statutory code of practice should be imposed to uphold the principle that the tied tenant should be no worse off than if free of tie.

• All tied tenants should be able to buy one guest beer, and tenants should also be given a genuine choice to opt out of the tie. However, any landlord with a brewing capacity and who owns fewer than 500 pubs should be exempt from any regulatory intervention in respect of the beer tie – helping small regional and family brewers.

• Rent calculations should take account of the true costs of running the business and there should be changes to rental valuations and the abolition of Upward Only Rent Review clauses from all lease agreements.

• Tied arrangements for fruit and quiz machines should be removed from all tied arrangements.

The issues facing the leased pub sector should be referred to the Competition Commission who should consider whether there should be a maximum limit on the number of pubs owned by any one pub company, both nationally and in any one region/area.

5. Fair Rates

Liberal Democrats will make small company relief automatic and also seek to ensure that the burden is spread more equitably between small and large businesses .

We would retain the mandatory 50 per cent business rate relief scheme available to sole village pubs and encourage local councils to use their discretionary powers to increase this relief to 100%. We also believe that in time a study should be commissioned into the costs and benefits of extending the scheme to other pubs that act as hubs of their local community and can demonstrate this.

6. Cutting the Red Tape

Regulations are needed to protect consumers, however they must be proportionate to the situation. The Licensing Act 2003 has created red tape for publicans and the cumulative burden of regulation is especially heavy on small businesses as they lack the economies of scale available to large businesses. We believe that:

• Where possible we should have a ‘one in one out’ policy for regulations to prevent an increase in the regulatory burden for pub owners.

• Follow up post-implementation reviews should also be carried out to check for unintended consequences of regulations. This will ensure that pubs are not placed under unnecessary financial burdens.

7. Live Music

Small venues are vitally important to Britain’s creative culture. Since the Licensing Act 2003 there has been a decrease in live music in small venues due to the red tape involved in hosting an event. We will cut red tape for putting on live music. We will reintroduce the rule allowing two performers of unamplified music in any licensed premises without the need for an entertainment licence and allow licensed venues for up to 200 people to host live music without the need for an entertainment licence.

i Axe the beer tax, A manifesto for supporting and promoting Britain's beer and pub trade

ii Ibid

iii See http://www.pintprice.com/region.php?/United_Kingdom/

iv British Beer and Pub Association, Budget Beer Tax Hike – BBPA Statement, 24-03-10.