Pub companies: Follow-up to the Government Response

PubCoFup 22A

Supplementary written evidence submitted by the

Department for Business, Innovation and Skills

Following the evidence session held on 6th December 2011 on the Government’s Response to the Select Committee’s report on pub companies, I promised to write to the Committee to provide further information on a number of points.

LEGALLY BINDING CODE: INTERACTION WITH SCOTTISH LAW

We have taken advice from the Office of the Advocate General, which as you know, acts as adviser to the UK Government on matters of Scots law. In short, the legal principles that apply when considering the binding nature of this Code are similar in both jurisdictions.

As in England and Wales, the Code can be incorporated into a new lease agreement either by it being set out in the actual lease or by reference to another document. The formalities required for a lease to be binding are contained in different legislation (the Requirements of Writing (Scotland) Act 1995 as opposed to the Law of Property (Miscellaneous Provisions) Act 1989), but this doesn't affect the central question of whether the Code can be incorporated.

Likewise, an existing lease can be varied to incorporate the Code or, as is being proposed in this case, a separate contract can be entered into by means of a written unilateral offer by the pubco to be bound by the Code, that can be accepted by the lessee/tenant at any time. OAG have also pointed out that the Scottish courts might view such an open offer as a promise (and therefore be capable of binding the pubcos even without it being accepted). This construction isn’t essential to achieve the desired objective, but shows why we can give strong assurances that existing lessees/tenants will get the benefit of the Code.

OAG shares our doubts about whether all of the obligations in the Code would be binding on successors in title, even if incorporated into the lease by way of a deed of variation. Some of the provisions may not be regarded as essential characteristics of the lease, though that would ultimately be a matter for the courts. OAG agrees that the solution to this uncertainty would be for a new pubco to agree to be bound by the code, which is of course what is being proposed.

REFERRING THE MATTER TO THE COMPETITION COMMISSION

I agreed to write to the Committee explaining why the Government didn’t refer this matter to the Competition Commission.

Section 132(3) of the Enterprise Act 2002 gives the Secretary of State power to make a reference to the Competition Commission if he has reasonable grounds for suspecting that any feature or combination of features of a market in the UK for goods or services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the UK.

That power may only be exercised if:

(a) the Secretary of State is not satisfied with an OFT decision not to refer (section 132(1)); or

(b) the Secretary of State has brought information to the OFT’s attention which he considers relevant to the question of whether the OFT should make a reference, but is not satisfied that the OFT will make a decision on whether or not to refer within a reasonable time frame.

The key question, therefore, that the Government had to consider was whether there were reasonable grounds to suspect that a competition problem existed, such that it couldn't be satisfied with the decision of the OFT not to refer.

The Government could not identify any such reasons. Significantly, in October 2010 the OFT had concluded that there were no competition issues adversely affecting consumers. This wasn't a case where the OFT had identified concerns but decided not to refer. The Government had no evidence to suspect that this decision had been taken wrongly. Nor did the Government have any new evidence that could lead to a different decision being made.

On that basis, a decision to refer the matter to the Competition Commission could have exposed the Secretary of State to challenge by way of judicial review.

The Government therefore concluded that there were no grounds to refer the matter to the Competition Commission.

BRULINES

As I stated to the Committee, upon re-examination the wording in the Government's response did not fully reflect the complexities involved in this matter. I apologise once again for this and welcome the opportunity to set the record straight.

When the response stated that Brulines equipment was not in use for trade, we were considering only a limited set of circumstances. One of these circumstances would be likely to be if the Brulines equipment were simply being used by the pubco for the purposes of monitoring, with no sanction resulting from the data.

However, where Brulines flow monitoring equipment is used for determining whether or not a lessee has bought beer outside the tie and the calculation of any fine or penalty as a consequence is based on that determination, the Government believes it is likely that the equipment would be considered to be in use for trade. However it is the responsibility of local authority trading standards where the need arises to consider the precise nature of the circumstances to ascertain whether offences have been committed under the Weights and Measures Act 1985 and this will ultimately be a matter for the Courts to decide.

Section 7 of the Act makes it clear as to the circumstances which determine whether or not equipment (like Brulines) is in use for trade. Where the transaction is by reference to quantity, the use of the equipment is for the determination of that quantity and the transaction relates to the transfer of money or money's worth then the equipment is in use for trade. There is considerable case law on the subject of use for trade and it is not possible to generalise however if the equipment is not considered to be in use for trade then it does not fall within the scope of the 1985 Act.

ESTIMATION OF COST OF MAKING THE CODE LEGALLY BINDING VIA DEED OF VARIATION

I agreed to write with our views on the BBPA's estimate of the cost were the code to be made binding through a deed of variation to each lease and tenancy agreement.

The Government did consider whether the Code should be made legally binding via deeds of variation. According to the figures produced by CGA Strategy, this would have involved some 28,000 leases and tenancy agreements.

We recognised that before entering into a deed of variation the parties would in all probability want to seek their own legal advice, which, given the numbers involved, would place a considerable cost on both the pubco and on the licensee community.

We couldn't of course identify with any precision what that legal costs would be. The Committee will appreciate that such costs would depend on the complexity of the individual lease or tenancy, the nature of the legal advice sought, and the charge-out rate of the individual legal adviser. The degree to which each pubco would choose to take individual advice on each lease was uncertain.

However, even assuming that the average cost per lease or tenancy of providing advice to the two parties was £250, which we suspect would be at the lower end of what reputable legal advice would cost, the cost to business for 28,000 leases/tenancies could be in the region of £7m. Whilst considerably lower than the 'in excess of £25m' figure that was asserted by the BBPA, this would nevertheless represent a considerable burden on both licensees and pubcos.

The department's aim was to find a solution that would make the Code legally binding whilst imposing the lowest possible burden on the industry as a whole. The solution that I set out in my letter to you of 5 December and at the evidence session meets these criteria.

A COMPULSORY GUEST BEER OPTION

In my evidence, I referred to a 2004 report by the Department for Trade and Industry which had indicated that the introduction of a guest beer right could be in breach of European Competition Law. I have since realised that the report in question was actually the Select Committee for Trade and Industry's second report of that session, on Pub Companies [1] , which cited evidence from the Department for Trade and Industry and agreed with the DTl's position on this matter.

DETAILS OF MEETINGS AND ATTENDEES

Over the course of the last year I have had the following meetings with stakeholders

to discuss pub industry issues.

– 01/12/2010 – Greg Mulholland MP/Chair of All Party Parliamentary Save the Pub

Group + Emily Ryan and Jonathan Mail (both from CAMRA - Campaign for Real

Ale), Simon Clarke and Kate Nicholls of the IPC.

– 16/02/2011 – British Beer and Pub Association

(–07/03/2011· Martin Horwood MP –· discuss a 10 min rule motion on a private

members bill regarding tied public houses)

– 08/06/2011 – Greg Mulholland MP + Mike Benner (Chief Executive, CAMRA) (with

Vince Cable)

– 28/06/2011 – Bob Neill MP/DCLG Minister

–18/07/2011 – Martin Horwood MP + Mike Benner (Chief Executive, CAMRA),

Jonathan Mail (Head of Policy and Public Affairs, CAMRA)

– 12/10/2011 – Simon Townsend from Enterprise Inns, Roger Whiteside from Punch.

Ralph Findlay, Chairman of the BBPA and Chief Executive of Marstons, Brigid

Simmonds from British Beer and Pub Association

– 01/11/2011 – Martin Horwood MP

– 03/11/2011 – Simon Longbottom, Managing Director of Pub Partners, Greene King;

Jonathan Neame, Chief Executive, Shepherd Neame; Paul Wells, Chair, Independent Family Brewers of Britain; Stuart Bateman, Chief Executive, Batemans;

William Lees-Jones, Chief Executive, JW Lees; David Turner Tenant and Lease

Director, Youngs

– 09/11/2011 – Greg Mulholland MP + Jo Swinson MP (with Vince Cable MP)

– 21/11/2011 – Tim Sykes, Chairman of Beds & Bars and ALMR President, Kate

Nicholls. Strategic Affairs Director of Association of Licensed Multiple Retailers, Nick

Bish, Chief Executive of ALMR,

– 23/11/2011 – Greg Mulholland MP, Martin Horwood MP, Tim Farron MP, David

Ward MP, D Foster MP and Jo Swinson MP

– 01/12/2011 – Ralph Findlay, Chairman of the BBPA and Chief Executive of

Marstons, Brigid Simmonds from BBPA

Edward Davey

Minister for Employment Relations, Consumer and Postal Affairs

8 December 2011