Small Business, Enterprise and Employment Bill

Written evidence submitted by the Association of Licensed Multiple Retailers (SB 27)

The ALMR welcomes the opportunity to submit written commentary on Section 4 of the Small Business, Enterprise & Employment Bill ahead of the oral evidence session being held on 16 October. As the only national trade body dedicated to representing licensed retail businesses, including multiple lessees, we are well placed to give an insight into the challenges independent small businesses faces in their relationship with their landlord and how the Bill will help to address them. Although the fine detail will only be determined in secondary legislation next year, the Committee Stage offers a unique opportunity to ensure the framework in which the Code will be developed is robust and focused on securing a fair, free and flexible market in our sector.

By way of background, the ALMR has been actively involved, on behalf of its members, in the ongoing political debate on the regulation of the relationship between pub companies and their tied tenants. We have given evidence in the 2004, 2009, 2010, 2011 and 2013 Select Committee inquiries and initiated a sector-wide mediation in 2008 to seek to resolve these issues.

Our membership covers the wide spectrum of licensed hospitality – high street bars, casual dining and night club businesses, but over a third are traditional wet led community pubs – and reflect the diversity of size of business within the sector, from national chains to single site venues, with two thirds of our members being SMEs with estates of fewer than 20 sites. Between them our 175 member companies operate just under 16,500 outlets, employing 400,000 staff. Of these, just over half will be operated on some form of lease and just under 3,000 of our members’ outlets will operate on a tied lease from a brewery or pub company.

Summary

Overall, we are pleased that the Government has moved to take decisive action in this area and that the Bill commits Ministers to implement these changes within a year. This draws a clear line under a long period of uncertainty which has undoubtedly hampered investment. The sector needs stability and consistency to ensure a fair, free and flexible market and its continued ability to generate jobs and growth right across the UK.

A Statutory Code is necessary to address persistent concerns about compliance with existing voluntary measures and inequalities in the relationship between pub companies and their tied tenants. The clauses of the Bill are a pragmatic, proportionate and measured approach and, given the extensive debate within Parliament prior to its publication, we believe that full introduction of its provisions can follow swiftly to deliver material benefit to tied lessees by providing market certainty and stability.

We are concerned to ensure that the proposed Code delivers statutory regulation at least as comprehensive and effective as the current voluntary Code and that the most stringent provisions are properly targeted. The focus on rent calculations, transparency of information provided by the pub-owning company and the ability to request a review in exceptional circumstances is, in our view, the correct one and, together with access to an Adjudicator in addition to existing dispute resolution mechanisms, will be key to addressing outstanding problems.

PART 4 – CLAUSES 35-63

The ALMR is particularly concerned to see the following issues addressed when the relevant clauses are debated in Committee, and has provided comments by exception.

Clause 36 - The Pubs Code

(1) ALMR welcomes the commitment from the Government to move quickly on implementing the provisions in the Bill. This will be vital to ensuring that there is no diminution of the protection afforded to existing lessees. The ALMR seeks clarity on whether the proposed timetable of a year after adoption of the Act relates only to the regulations relating to the Code or to all secondary regulation under Part 4; it is vital that it is the latter.

Moreover, we are concerned to ensure, however, that the timetable refers not just to the making of regulations, but also their implementation. The ALMR would not want to see the Statutory Code exist after one year and then wait a further lengthy period for the enforcement of that code; given the protracted preceding debate, there should be no need for a transitional period. Therefore ALMR urges the Committee to ensure that the regulations covering the Pubs Code and the Adjudicator come into effect within one year of the Act as part of a comprehensive suite of legislation.

(4) We note the reference in this clause that the second overarching principle – namely that tied pub tenants should not be worse off as a result of any product service or tie – should only apply to the tenants of large pub-owning businesses. The ALMR would like to see this interpretative principle apply to all tied pubs and the phrase "which apply only in relation to large pub-owning businesses" deleted.

The size of the company is not a determinant of behaviour but of potential risk – therefore the mitigation of this risk needs to be calibrated accordingly for those larger pub owning businesses. While we therefore accept that the way in which it will be applied and, more particularly, enforced against larger pub owing businesses will be different, the requirement for the Code to be interpreted purposively in accordance with it will be vital to delivering behavioural change across the sector.

(5) The Code must provide for full transparency of all business terms and disclosure of all relevant information to place both parties on a more equal footing and to enable tied tenants are equipped to enter a robust commercial negotiation. The ALMR has set out its views on the draft Code published in Annex F to the Government’s Response to the Consultation in June 2014 at the end of this paper and made recommendations on changes better to deliver this objective. We have also sought to cross-reference points in the Code where they relate to specific clauses. The ALMR considers that the only outstanding issue is the planned consultation on the tests that would trigger an open market rent review.

(6) This clause states that the Pubs Code would require large pub owning companies to provide parallel rent assessments. Were this to be widely interpreted and applied, we believe that it would materially improve transparency and the negotiating position of tied tenants. However, the current draft Code only requires parallel rent assessments in very narrow circumstances, having to apply to the adjudicator for this level of information and then only when negotiations have broken down. We believe that this will result in more cases being referred to the Adjudicator than would be the case if full transparency and disclosure were introduced earlier in the process.

The ALMR would like to see the Bill require large pub owning companies to provide parallel rent assessments on request as part of a rental negotiation. Once the large pub owning companies have done this and there is a dispute over the terms or the rental negotiation then breaks down should Part 8 of the Pubs Code apply and the Adjudicator become involved. In our view, it is not for the Adjudicator to have to take action to provide for greater transparency in rent setting – the statutory provisions in the Bill should ensure that this is automatically the case.

The ALMR would also welcome greater clarity on part (a) of this clause. Is the intention for the Adjudicator to test or determine the validity of a parallel rent assessment or is it the intention for the Adjudicator to determine the rent where this assessment is requested? In our view, the focus of the Adjudicator’s role should be in determining where and how the market has not functioned properly in specific cases.

Clause 37 – Review of The Pubs Code

(1) A LMR would like to ensure that the reviews of the Pub Code (provided for in Clause 37) and the review of the enforcement and adjudication process that supports it (provided for in Clause 56) should be undertaken at the same time and findings shared as part of a comprehensive report.

(4) The ALMR would like to see the term ‘soon as practicable’ deleted from the Bill in favour of a specific timetable. As part of the review process the ALMR would like to see the Secretary of State publish their report to Parliament within 3 months.

Clause 38 – Inconsistency with Pubs Code etc

(1) We are unclear what the intention of this clause is and how it will be applied in practice. It is not clear from this clause whether the intention is to allow the Secretary of State to determine whether generic clauses in specific agreements are incompatible with the Code or whether this is a more general provision akin to unfair contract terms legislation. The ALMR would like to understand how the Secretary of State would be notified of incidences where the terms of business were inconsistent with the provisions of the Pub Code. Who would inform the Secretary of State that there had been a breach and regulation was necessary?

(4) The ALMR would like to ensure that this clause affords more general protection for tenants seeking to exercise their rights under the Code and is not restricted solely to tenants referring disputes to the Adjudicator. We would like to see clause (4)(a) amended as follows – "prevent the tenant from referring a dispute to the Adjudicator for arbitration in accordance with section 39, or ‘to other independent dispute resolution or arbitration mechanism (eg PIRRS/PICAS)’ or"

Clause 39 – referral for arbitration by tied pub tenants

(3) The Bill makes provision for only certain aspects of the Pubs Code to be arbitrable but the current draft Code does not identify which of the provisions would fall within the scope of this clause. However, there is nothing in the current draft of the Pubs Code that says that any of its provisions are arbitrable. The ALMR would like explicit references in the Code to those specific provisions that are arbitrable, if it is the Government’s intention that this should be the case.

(5) It is our view, however, that all of the provisions of the Code should be capable of arbitration if we are to effect behavioural change. We note that the industry’s own voluntary self-regulatory found that it was essential to have a wider dispute resolution service rather than one which was restricted to arbitrating on rental matters and it is vital that the Adjudicator has similarly wide-ranging powers.

(6)(b) The ALMR considers that existing bodies like PIRRS and PICAS could support (rather than compete with) the Pubs Adjudicator in the arbitration process. PIRRS and PICAS could provide a ‘triage’ function to an agreed criteria dealing with certain cases to avoid ‘bottle necks’ in applications to the Pubs Adjudicator. The ALMR would like to see the clause amended as follows "appoint another person to arbitrate the dispute ‘including other independent dispute resolution or arbitration mechanisms (eg PIRRS / PICAS)’"

Clause 40 – Timing of referral for arbitration by tied pub tenants

We are concerned that the timetable in these clauses may not be practical. The ALMR has noted that tenants often raise the issue of potential non-compliance with the current voluntary code early on in any dispute with their pub company, particularly with regard to rent negotiations. It is not unusual for there to have been six months of internal discussion before a case is referred to PIRRS or PICAS. As such, the ALMR would like to see the clause amended as follows:

(2) "…with the date on which the tenant ‘ formally notifies the pub owning business in writing’ of the alleged non-compliance"

(4) The ALMR would like to see 4 months replaced by 6 months.

Clause 42 – Arbitration: supplementary

(3)(c) The ALMR would wish to see the details of the regulation before determining whether these provisions are fair and do not deter tenants with genuine cases. Where a tenant’s case has merit, the ALMR believes that the fee should be refunded.

(7) The ALMR considers that there should be transparency around the fees and associated costs of arbitration. The fees should not be set at such a level that deters tenants from embarking on a course of arbitration.

Clause 44 - Investigations by Adjudicator

(1) The ALMR would like to understand how the Pubs Adjudicator determines reasonable grounds for holding an investigation and what the triggers are for such an investigation – is it own initiative or at the request of an individual tenant, a representative body or under political direction. The ALMR would like to understand where the Adjudicator would receive the information from and what research the Adjudicator would undertake independently to inform whether an investigation was warranted.

(2) The ALMR suggests that the Adjudicator might like to set out in guidance (in Clause 52 of the Bill) the criteria which interested parties should have regard to when considering writing to the Adjudicator to request an investigation.

Clause 45 – Adjudication reports

(3) The Bill suggests that any investigation report published by the Pubs Adjudicator need not identify the pub owning business concerned. The ALMR considers that the withholding of such information should only be considered in exceptional circumstances. Our experience with PIRRS and PICAS demonstrates the beneficial deterrent effect that identification of companies has had. Given the importance of bringing transparency to the sector the ALMR would like the Adjudicator to set out in guidance the exceptional circumstances in which such information would be withheld.

Clause 46 – Forms of Enforcement

(1)(a) The ALMR would like to see the clause amended as follows to replicate current best practice under the self-regulatory regime – "make recommendations ‘that remedy the situation the tenant finds themselves, rectify any errors or omissions and which may include financial compensation where this has been deemed necessary’".

Clause 49 – Financial penalties

(5) We note all financial penalties will be paid into a consolidated fund and that this will be held by the Treasury. We would welcome clarification as to whether these penalties would then be used to invest in the work of the Adjudicator or to compensate successful claimants.

Clause 56 – Review of Adjudicator and guidance from Secretary of State

(1) ALMR would like to make sure that the reviews of the Pub Code (provided for in Clause 37) and the review of the enforcement and adjudication process that supports it (provided for in Clause 56) should be undertaken at the same time and findings shared.

(6) The ALMR would like to see the term ‘soon as practicable’ deleted from the Bill. As part of the review process the ALMR would like to see the Secretary of State publish their report within three months.

Clause 60 Pub-owning business and large pub-owning business

The ALMR agrees with the Government that the Code must apply to anyone who owns tied pubs and for there to be enhanced provisions applying to those who own 500 tied pubs or more. We believe that there is scope for there to be greater differential between the two codes.

The Code as currently drafted refers to micro businesses but we note that the Bill does not offer a definition of them. The ALMR has set out in an annex to this paper what a definition could constitute and would like the Government to make explicit that the measures contained in this Bill apply to them.

Clause 61 – Tied pub tenant, landlord and tenancy

(2) The ALMR would like to see the Bill explicitly exclude ‘tenancies at will’ from these measures. These are often emergency measures designed to keep the pub open on a temporary basis (usually for a period of 3-6 months but sometimes up to one year). They cannot be renewed; there is no danger of them being rolled over and they can be exited at any time.

Clause 63 - Regulations under this Part

(2) The regulations governing the abolition of the Adjudicator under Clause 57 (1c) should also be subject to affirmative resolution.

Also, the ALMR notes that the Bill makes no provision for the abolition of the Pub Code. Would it be possible to abolish the Adjudicator and still operate a statutory Code?

October 2014

ANNEX: Draft Pubs Code – ALMR Commentary

The ALMR has worked extensively with all stakeholders on the development of the current Industry Framework Code and potential revisions to it. In particular, over the early part of 2014, we brought together all lessee groups on the Pub Governing Body to refine the Government’s proposed draft code published for consultation in 2013. Our comments below reflect the outputs from this group.

Definitions:

- Business Development Manager: The ALMR is concerned that this is widely drafted and could be taken to apply to anyone in the pub company who has ongoing contact with the tenant, e.g. sales people taking calls about beer deliveries. The ALMR would like to see this focused on those "responsible for the Pub Owning Business’s interactions with the tenant in respect of rent or future business planning purposes" in order to ensure that the objectives of the Code are effectively delivered.

- Micro business: The draft Code refers to definitions in legislation, but there is no reference within the Bill. Our preference is for the basic code to apply to all tied landlords, but we accept that a derogation for micro businesses might be helpful. This should be based on EU definitions, with employee numbers referring to FTE workers and focused on those employed in the pub owning side of the business.

- Temporary agreements: The ALMR consider that these should be excluded from the legislation. Tenancy at Will (TAW) agreements are always temporary in nature and usually fixed in term – they are a short term, expedient measure to keep a pub open when there has been an exceptional event eg death or bankruptcy. In these cases, the temporary agreement is usually offered to a management company which specialises in such situations and provides a stop gap service. This relies on a low cost, quick fix and the professional management company is well versed in assessing the risk. Occasionally, a TAW will be offered on a temporary basis to an existing lessee pending the arrival of a new long term tenant. It is extremely rare for a TAW to be offered to a new tenant and there is no possibility of a TAW being rolled into a longer term agreement without the Code’s due diligence being applied. One agreement ends and the other takes over. At present, under the Industry Framework Code, due diligence checks are taking around 2-3 months to process and we are keen to ensure that there is no diminution of existing requirements.

Part 2 - Interpretation of the Code

- Under the existing self-regulatory regime, the overarching principles of the Code apply to all. The ALMR notes the suggestion that the principle that a tied tenant be no worse off than a free of tie should only be applied to tenants of large pub companies. However, an over-arching principle and one which is designed to allow the Code to be interpreted purposively should apply to all. The way in which this is demonstrated or the compliance required to achieve it may well be different for different types of companies, but the principle should apply to all.

The existing Framework Code also includes references to how the principle of fair and lawful dealing is to be delivered, with explicit reference to transparency of business dealings and disclosure. It states that "companies agree to act at all times within the spirit of the Code, with integrity, honesty and full transparency, particularly with regard to terms of business and charges made or costs passed on. The Code exists to promote transparency by requiring full disclosure of all relevant and appropriate information to ensure both parties are equipped to enter into a commercial negotiation. Fair and lawful dealing will be understood as requiring the Pub Company to conduct its relationships with Tenants in good faith, without distinction between formal and informal arrangements and without duress". We believe there would be merit in mirroring this language.

Qualified Person Requirements

- Point 8 requires the pub company to satisfy themselves that a tenant is a suitable and proper person before a tenancy is ‘agreed’. In contrast, current due diligence required under the Industry Framework Code must be completed "before a substantive agreement is offered" and we continue to believe that this is preferable to "before a Tenancy is agreed". The latter is quite late in the process – effectively at the point that a decision has been made and the agreement is being signed - and the Tenant may have made commitments and based their business, financial and personal planning on discussions held with the Pub Company without either side entering full disclosure or satisfying themselves fully as to suitability.

The purpose of this section is to ensure that the applicant has a degree of knowledge and competence before entering a detailed commercial negotiation – but as drafted would only effectively come into force once that commercial negotiation on a specific property and terms of agreement has been concluded. That cannot be right – it would be sensible therefore if the requirements were pushed further back in the process and the wording amended to "Before a substantive agreement/tenancy is offered".

Business Plan

- Point 11: As per above, the requirement for a business plan to be in place should take effect before a "substantive agreement/tenancy is offered" not "agreed or renewed".

- 12 (a)(i): this should refer to independent professional advice "from an accredited professional with relevant experience of working in the licensed retail trade" as per the current Industry Framework Code, to ensure that this is robust.

- 12 (b) insert "and matters to which they should have consideration" after market comparisons as per the current Industry Framework Code.

Information Requirements

- Point 13: Again, the ALMR considers that it is vital that this is provided before a new agreement is "offered" not just at the point of "commencement" or "renewal" and we believe a new 13 (c) at rent review should be inserted.

- Point 14 iii: insert two new bullet points – terms on which gaming machines were supplied and arrangements for the distribution of income; and outline trading, payment and credit terms.

- Point 14 iv: for the avoidance of doubt, at the end of this clause insert "unless otherwise specified in the lease, all provisions should be considered to be ‘keep’ not ‘put’". This will ensure that tenants do not face unexpected additional costs or dilapidations or bear undue property risks without this being reflected in the rent.

- Point 14 vii: this clause requires the pub owning company to make clear the range of support services it provides and which are available to the tenant. These are in effect SCORFA and are taken into account by the tenant in assessing the proposed rent and trading terms. For tenants of large Pub Owning Companies, the Code should make clear that any specific support services detailed under 14(vii) and indeed contractual discounts offered under 14(iii) form part of the terms of on which the lease is offered and should not be capable of unilateral alteration – this could be a trigger for an exceptional rent review request under clause 25. A reference to "any such services offered at the start of the tenancy will be considered to form part of the terms on which the agreement was concluded" should be inserted at the end of 14(vii).

- Point 14 xii: it would help to include a reference to decorating or maintenance funds as well as rent deposit arrangements. We also believe that these should be required to be kept in ring-fenced funds.

- Point 15f i: experience suggests that this time frame be amended from 6 to 12 months

- Point 15f iv: insert "...a survey will be conducted by the landlord"

Part 7 - Rent Negotiations

The bullet point paragraph number is inconsistent and there is duplication – we have replicated this for ease of cross-reference

- Page 141 Point 15: should be amended to read "the assumptions included in the rental assessment model ‘must be reasonable’ and supporting evidence where available will be ‘provided and must be’ fully justified.

- Point 16: The ALMR does not believe it would be appropriate for the timetable for information to be provided in advance of rent negotiations to be left to the discretion of pub companies. This would be a retrograde step and reduce the current requirements of the Industry Framework Code. This clause also appears incompatible with point 24. We therefore believe this paragraph should be removed.

Under the Industry Framework Code, all information must be provided 6 months before a rent review or renewal falls due and the negotiation should be concluded within 3 months of that date unless the timetable is extended by mutual agreement. Tenants have a right to go straight to PIRRS if the 3 month timetable is missed and no agreement to extend it is reached. These timetables are important new protections which must be replicated in the Statutory Code.

- Point 18: we believe that this clause should also refer explicitly to minimum purchase obligations as these deliver the same effect of UORR.

- Point 19: The ALMR would like to insert "In particular, the level of detail provided should be sufficient to allow the prospective lessee to take proper professional legal advice on the terms, conditions and effect of the tenancy being offered" to mirror existing Industry Framework Code requirements.

- Point 20: The ALMR would like to insert "is fully justified and explained" at the end of that clause. This continues to be a problem in respect of current rent negotiations.

- Point 20(b) – The ALMR would like to insert "all" ahead of volumes and reference to "where available" should be deleted; as these are purchased direct from the company, this information will be available, particularly at rent review.

Point 21(b): – The ALMR would like to delete "seek to" to remove any degree of latitude for non-compliance. Again, this is an area where problems have arisen with regard to compliance with the Industry Framework Code.

- Point 22: The ALMR would like to delete "made" so the onus is on the pub company to make it available and to only fail to disclose if the information is not available or if they have a legitimate commercial reason. The ALMR suggest that there is a reference inserted here to third party determination to mirrors the existing Industry Code. So this clause would read "If any information is not available the Pub Owning Business must disclose and explain the reason for this. Information which may be used in third party determination of rent should not be unreasonably withheld and should be shared on request, subject to appropriate confidentiality agreements". The ALMR appreciate that the latter point is included later in the Code, but it would be helpful if it was reiterated here for the sake of clarity.

- Point 24: The ALMR would like to insert at end "and the parties should aim to complete negotiations within 3 months after the due date, unless an extension to this timetable is mutually agreed". This mirrors the existing Industry Framework Code

- Point 25 (iii)(iv) We believe that two new tests of exceptional circumstances should be inserted to allow a tenant to ask for a rent review – if there is a change of owner; or if the contractual terms on which the agreement was offered made have been substantially altered.

Parallel Free of Tie Rent Assessments

- Point 26: while the Bill refers to the preparation of parallel rent assessments, the Code appears to suggest that this can only be done by applying to the Adjudicator where rent negotiations have already broken down. The ALMR believes this to be unhelpful and would suggest that a right to request a parallel rent assessment to aid transparency in rent negotiations or where offer and counter offer have been refused but without the input of the Adjudicator could be helpful. Production by the company on request could help to resolve disputes without the need for independent recourse and could help to focus Adjudicator resources to expedite the most challenging cases or instances of market failure.

- Point 31(a): The ALMR considers that a 5 week failure to respond to a counter offer is a very long time period indeed and is arguably too long, bearing in mind the aim is to conclude within 3 months of rent review date. Standard terms would be 28 days

- Point 33: The ALMR would like to include a reference to "reasoned and fully justified assumptions".

Business Development Managers

- Point 37: The ALMR would like to see this training to be accredited and for them to have a qualification before carrying out a rent negotiation

Assignment

- Point 39: Industry recommended best practice is for requests for assignment to be responded to within 28 days of receipt of request. The ALMR would like to see this reflected in the Statutory Code.

- Point 41: The ALMR considers that there are some practical difficulties in delivery of this objective due to the way in which it is drafted. Whilst we agree that the Pub Owning Company should ensure that an assignee has the relevant professional advice and experience required for a new lessee under part 4 &5 of the Code, this is a requirement on the Pub Owning Company not the assignor. This is missing from the current draft and should be reinstated. In terms of the information requirements, the assignor will often not have this information and may not have been provided with it by the landlord (assignments will tend to take place well in the life of the lease and some will relate to agreements entered into before Industry Framework Code refinements). For the sake of clarity, it would also be helpful if this section referred to the assignee or assignor rather than Tenant. Para 40 should therefore require the Pub Owning Business to provide the assignee with information and para 41 should read "the Pub Owning Business must provide the information at Part 6 of the Code to the assignee within 28 days if requested by either the assignee or the assignor." The alternative would be to make clear that this clause only related to assignment requests for leases first taken out after the Code took effect.

- Point 42: Given that clause 41 only requires information to be provided if requested specifically, it seems odd to reference a requirement to provide it in all cases as part of clause 42. The ALMR suggests that this is reworded to replace "the information at Part 6" with "all relevant information requested by the assignee" and notes that there is a requirement for a general proviso ensuring that consent to assign is not unreasonably withheld.

Codes of Practice

- Point 48: The ALMR would like to insert "and will form part of the tenancy and contract terms on which the agreement is reached".

Compliance

- Point 49: Although the ALMR does not believe that this should be substantive or onerous requirement, we nevertheless accept that the intention in the Industry Code was for these compliance requirements to apply only to those businesses with more than 100 leases. We therefore recommend that the requirement to nominate a compliance officer and produce and publish a compliance report should only apply to Large Pub Owning Companies.

Dispute Resolution

- Point 59: The ALMR considers that it would be helpful to refer to external independent dispute resolution process, arbitration or legal proceedings.