Small Business, Enterprise and Employment Bill

Written evidence submitted by the British Beer and Pub Association (SB 18)

Summary

The British Beer & Pub Association (BBPA) welcomes the opportunity to make this submission to the Bill committee on behalf of its members, who produce 90% of beer sold in the UK and own 80% of leased and tenanted pubs. Member companies are totally committed to fair, transparent and lawful dealing with tenants and lessees and all other business partners and against any abuse of the tied pub model. They are committed to self-regulation and have established independent complaints panels for rents (PIRRS) and for any other aspect of the Industry Framework or individual company codes (PICA-Service) and which are working well. Whilst we remain of the view that a statutory code and adjudicator are unnecessary, we are committed to working with the Government and Parliamentary process in order to achieve a workable solution for the sector.

We also recognise that the Government addressed a number of problematic elements following the original consultation. However, the BBPA still has serious concerns around several key aspects of this Bill; the ensuing regulatory burden and the unintended consequences of the Bill is currently drafted. These are the ‘no worse off’ principle and how this is achieved in practice through the operation of the adjudicator (including the ability to set rents which is linked to this), the inclusion of temporary agreements, franchises and small companies in the scope of the legislation, and concerns within the statutory code itself and the ability to change the content of the code without proper consultation. We set out our views on these subjects in more detail below and would ask that the Committee look closely at these in their discussions to ensure the Bill is workable and fair to those owning and operating tied pubs.

1. Clause 36 (4). The BBPA, our members and those outside our membership operating tied estates have very serious concerns about the ‘no worse off’ principle. This provision introduces a system of regulated rents for substantial parts of the industry. This system will operate through the determination of individual disputes, with no appeal to a specialist tribunal and only very restricted rights of appeal to the Courts. We are therefore of the view that the principle above will establish price controls inconsistent with a market economy and in breach of EU competition law. Any enforced transfer of value in relation to individual agreements also risks breaching the European Convention on Human Rights in not allowing companies’ the right to enjoy their property.

2. Our members are also concerned about how this system of rent regulation will work in practice once it becomes enshrined in law. A major concern has been confirmed by the Minister Jo Swinson’s letter to MPs (following the second reading debate), which clearly sets out the intention that the adjudicator will be able to both assess whether a rent complies with the ‘no worse off’ principle, and if not will have the power to set the rent level for individual agreements.

3. In the response to the original consultation, BIS rightly recognised and as was confirmed by London Economics, that offering a mandatory free of tie option and a guest beer option would undermine the tied model and lead to ‘a high degree of uncertainty in the industry’ and ultimately destabilisation and pub closures – estimated at up to 8,000 job losses and 1,600 pubs shutting (see Annex). However, by confirming that the adjudicator will have the power to arbitrate and enforce set rents for an individual agreement, uncertainty is re-introduced which will lead to serious unintended consequences. It would be difficult enough to produce a comparative rent assessment for illustrative purposes, (as originally envisaged in the consultation using SCORFA [1] ), and even more problematic to create such an assessment which would be used to determine actual rents at an individual pub level.

4. We are of the view that the Government has underestimated the complexity and scale of such an exercise, (for example there are currently 3-5,000 rent reviews, renewals and new agreements per year), as well as costs, and even against what criteria comparisons are carried out. As set out in Royal Institute of Chartered Surveyors guidance, comparing tied and free-of-tie agreements is ‘problematic’. There are significant differences (such as SCORFA) between such agreements and, for example, there are few, if any, traditional free-of-tie brewery tenancies to compare with. For example, there is no comparable model to the tied short term tenancy model (three to five years), as in any other untied business agreement the landlord would not bear all the risk at his own cost in the same way as a tied agreement.

5. Setting rents or prices for an industry is not an appropriate role for an adjudicator. Prices are set only in regulated industries where competition is non-existent or substantially muted. Such regulated prices are arrived at by a process that involves complex analysis of the economic position of the undertakings concerned. We note that there is no proposal that this should be undertaken by the adjudicator, and such a process would be completely unjustified in a situation where there is a keenly competitive market. The consequence is, however, that the adjudicator is likely to be able to take into account only the interests of the tenant. This is not only unsatisfactory, but also unfair.

6. There are also vital technical amendments dealing with the workings of the parallel rent assessment which will need to be addressed - the legislation as drafted does not allow for such rent assessments to be carried our practically and in line with RICS guidance. For example, for this to work in practice, the line in Clause 62 (1) reading "(assuming that the tenancy is unchanged except in respect of terms relating to such ties)" should be removed.

7. Clauses 39, 42, 49, 50. All mentions of the adjudicator in the legislation need to be clarified, as at present it is not clear as to the operation of the adjudicator/arbitration function, (for example the lack of clarity around the mechanisms and evidence base for companies wishing to challenge decisions made by the adjudicator) and the apparent deviation from the Grocery Code model in terms of individual rent negotiations. The legislation also needs to be clarified in respect of disputes against companies by tenants, as at present the legislation could allow for vexatious or unsubstantiated complaints to be heard at a cost to companies.

8. Clause 61 (2) (d). As drafted the legislation will cover all genuinely temporary agreements which we believe is not the intention of BIS. These temporary stop-gap agreements between companies and tenants are hugely important and put in place to keep a pub trading whilst a longer-term tenant is being sought. Both parties are aware this is a short term arrangement which can be ended on short notice, (to the benefit of both parties) and hence why they are excluded from the current voluntary code. By including them in the statutory code, with the same provisions as a substantive agreement, this will result in such agreements being too onerous to continue – which will lead to pubs being closed and boarded up between tenants, which is in nobody’s interest. We estimate that just over 10% of tied pubs are on such temporary agreements – around 2,100 pubs – which would be at risk of being closed between substantial agreements. We feel that the current 12 month cut-off for temporary agreements should be retained. If there is a concern that ‘rolling’ temporary agreements may be granted to avoid code obligations, a form of words that will avoid this whilst also allowing genuine stop-gap agreements to continue, could be the following: clause 61 (2) (d) "in pursuance of a provision of, or made under, an Act, but excluding agreements where the tenant is in situ for less than twelve months." This would seem to us a proportionate and fair solution.

9. BBPA continues to support the position that companies operating less than 500 tied pubs should be exempted from the code (as long as there is no material distortion of competition). IFBB members have committed to fund self-regulatory structures if BIS decided to remove them from the scope of the statutory code. Significant costs would be placed on small business if the legislation goes ahead without such amendments. Vince Cable, speaking in Parliament on this subject recently [2] , stated that "we have no wish to create problems for the small, family-owned pubs, which are an extremely important part of the industry… (they) are already subject to the voluntary code. In a sense, it would be right for tied pubs of all kinds to be given some protection."

10. Clause 61 (1) (b). The wording contained in the Bill allows for the same safeguards to be applied to someone looking at taking on a tied agreement, as to an established tenant already trading in the premises. We agree with the Government that protection should apply to those entering negotiations on rent for a tied agreement, however the legislation as drafted is far too wide, and would be very difficult and costly to implement in practice. For example, pub companies receive hundreds of expressions of interest in their pubs per year – not all of which will result in an agreement – and it would be practically impossible for a company to place all of these under the protection of the code. During discussions on this issue when drafting a potential industry standard code with tenant groups, this was recognised and a form of words which would be practically workable and provide protections for tenants taking on a pub: "61 (1) (b) who is party to negotiations which have reached the stage of a provisional trading agreement for the prospective tenancy of a premises which are, or expected to be, a tied pub ahead of any final terms of the agreement being agreed."

11. Clause 37 (4). We are of the view that there are insufficient safeguards in the legislation to prevent the Statutory Code being amended at a later date. Proper consultation and Parliamentary scrutiny should be required for any changes, as indicated in the Government response to the consultation. This must be on the face of the primary legislation to ensure the Code cannot be arbitrarily changed in the future. This is reflected in Groceries Code, which can only be changed after a full Competition & Markets Authority investigation and not changed arbitrarily. We would suggest that Clause 37 (4) page 31 is amended, with the addition "any proposed changes to the Code must be subject to full parliamentary scrutiny and public consultation."

12. Franchises. We remain of the view that ‘true’ franchises should be excluded from the Code as they are a completely different business model from a tied tenancy as they are based on a simple profit share arrangement. A definition of franchise could be only those business models fully approved by the British Franchise Association (which has its own codes of practice to protect franchisees), or other wording of such a definition that reflects this. There would be no difference between, for example, a brewer offering a franchised profit share arrangement on a food-led large dining pub, and a restaurant company offering an identical franchise – which could lead to unintended consequences of non-brewer/pub companies being caught under the code, as they have alcohol franchise agreements as part of their restaurant offer, (which would be licensed the same way as a public house).

13. Clause 38 (3). The legislation should specify that the provisions of the code will initially be applied to leases or tenancies only at agreed break points, (such as rent reviews or renewals) in current agreements, rather than applied to all leases and tenancies retrospectively. If a rental clause is declared void, the effect might well be to render the whole agreement void and of no effect, because payment provisions in agreements are usually not severable. Rendering agreements void is likely to be in no-one’s interests.

14. Finally, whilst we understand a further consultation will be undertaken in relation to the Statutory Code S.I itself, it is important that the Committee reflect that, as drafted, it is particularly onerous in a number of areas - particularly for smaller companies. The Code also needs to properly reflect key differences between shorter term traditional tenancies and longer-term assignable and fully repairable lease agreements. Examples which we would ask that the Committee direct BIS to consider further as not suitable for short term tenancies are the stipulation of RICS valuer sign-off; requirement for code compliance officers and business development manager obligations. It is also vital that BIS and the adjudicator work with companies to agree what components the parallel rent assessment may include, what interpretation can be then be drawn from the numbers considering such complex and different business models and agreements and therefore limitations of this exercise. For example, an apparently simple question – what is a comparable free-of-tie price - does not have a simple answer. As currently drafted the Code also does not place a duty on the tenant assigning their lease to another prospective tenant to provide information on the business they are selling. An assignment is the sale of a going concern, not simply the sale of a lease, and as such the sitting tenant will have information that should (under the intentions of the Code), be disclosed to the potential purchaser.

October 2014


Annex to BBPA response to Small Business, Enterprise and Employment Bill Committee

London Economic study: key conclusions

· Independent study commissioned by BIS to consider wider economic impact of consultation proposals

· Sample outlet level data provided in confidence for over 1000 pubs and econometric model built utilising wide range of scenarios and sensitivity analysis.

· First round effects of different policy options...up to 38,000 jobs losses

· Second round (final) effects assuming 60% of customers go to other pubs still up to 8,000 job losses and 1,600 pub closes

Study quotes:

" There is a real possibility that each of the proposed policy reforms, except possibly the code without permitting guest beer, instead of delivering the policy objective of ensuring tied tenants are treated fairly, i.e, ‘no worse off’ than free of tie tenants, may lead to the end of a large scale tied pub system."

"In the short‐term, it is also worth noting that the PICAS/PIRRS system, which is the most concrete element of the current voluntary framework, is now becoming an established part of the infrastructure, and appears to be having some effect in starting to address the worst tenant circumstances

"It is our conclusion that the reforms proposed in the consultation will close up to 1,600 pubs, although there is very great uncertainty about the precise value; In particular, the size of the transfer from pubcos to tenants resulting from the ‘no worse off’ principle is very hard to estimate, our results reflect the impact of a range of possible transfer values; However, there is clearly surplus pub capacity, in quite a volatile market where, with so many pubs on the margin of viability it is hard to determine which pubs will close."

· One of the most important points made by London Economics is in relation to why their conclusions differed from the initial BIS impact assessment (who had envisaged that no pub would become unviable as simply a transfer of profit from one party to another). London Economics noted that BIS had not factored in capital costs (only operational costs) incurred by pub companies. For a pub to remain viable the income would need to cover these as well.


[1] Special Commercial or Financial Advantage

[2] Hansard, Commons Debate, 11 September 2014 c1064

Prepared 15th October 2014