Small Business, Enterprise and Employment Bill

Written evidence submitted by Admiral Taverns (SB 32)

1.0 Introduction

1.1 Admiral Taverns welcomes the opportunity to make this submission to the Bill committee to outline our specific concerns around some of the current proposals within the statutory code for Pub Companies that is currently being considered.

1.2 Admiral Taverns was founded in 2003 and operates a predominantly tenanted estate of 980 pubs. Our estate is largely composed of traditional community pubs spread throughout England, Wales and Scotland and we are disproportionately represented in more socially and economically challenged communities where our pubs play a critically important role in terms of social amenity and local employment. Throughout the 18 month consultation period we have provided compelling evidence that we are a responsible business which is totally committed to fostering transparent positive working relationships with our licensees. We work hard to support our licensees helping them to optimise the potential of their business and securing the long term viability of our pubs despite the significant economic and social challenges facing the community pub sector. The low cost of entry and highly supportive approach of Admiral Taverns is an important factor in the sustainability of many of these more marginal pub businesses. We have a proven track record of investing significantly in a sector that is les fashionable and would not attract alternative means of funding or investment without the shared incentive that is a fundamental principle of the tied model.

1.3 As part of the evidence provided we were able to confirm that within the existing voluntary framework we have never had a single complaint from one of our licensees referred to PICAS (Pub independent conciliation and arbitration service) and furthermore we have never had a single rental valuation case referred to PIRRS (Pub Independent Rent Review Scheme). More importantly we are extremely proud of the fact that 75% of our licensees would recommend us as a business partner to another licensee as evidenced by the annual independent tenant track survey. This level of advocacy (the ultimate endorsement) is exceptional, has improved every year for the past 4 years and is consistent with a business that develops and enjoys positive and supportive working relationships with its licensees. As further endorsement of our approach and relationship with our licensees we received the industry award for the best Leased and Tenanted Pub Company in 2013 beating many of the smaller companies in the process.

1.4 It is for these reasons that we do not believe that statutory intervention is appropriate or required in our business and nor do we believe that the number of pubs owned should be the basis of inclusion or exclusion from such a statutory code. In reality we are not a large business, we employ just over 100 full time employees and generate modest returns given the scale of investment into our pubs. We feel that the imposition of statutory regulation on us merely as a result of the number of pubs we own is wholly unjustified and potentially anti- competitive. That said we are now committed to working with government to reach a workable and lasting resolution to the issues that have been raised within the BIS report so that we can have the confidence and certainty to continue to invest in our pubs and support our licensees.

1.5 We would therefore highlight the following specific areas of concern within the proposed bill. Our concerns are based on the potential unintended consequences that may result and proposals that will be unworkable, anti-competitive or open to legal challenge in practise.

2.0 Specific areas of concern within the draft code

2.1 Clause 36 (4) Principle of no worse off and parallel rent assessments

It was our clear understanding that the government was looking to introduce a statutory code to deal with behavioural matters and would not be looking to enforce a transfer of economic value from pub companies to licensees. Rightly, this reflected the work performed by London Economics on behalf of BIS which identified that any transfer in value would lead to increased uncertainty in the industry and would eventually result in a significant number of pub closures and loss of employment.

2.1 We therefore have very grave concerns about the ‘no worse off’ principle. This provision would introduce a system of regulated rents for a substantial part of the industry, with no appeal to a specialist tribunal and limited rights of appeal to the courts. This appears to bring an element of price controls to a competitive industry which appears to be inconsistent with the principles of an open market economy and a statutory code dealing with behavioural matters only.

2.2 As stated above, we are very concerned about how this system of rent regulation would work in practice. Our original understanding was that the parallel rent assessment would be available to licensees (for a small fee) and this would purely provide additional information for licensees in their discussions with the pub company regarding rents and commercial terms, consistent with one of BIS’s objectives of ensuring greater transparency. However, it is implied within the letter from Jo Swinson dated 5th August 2014 that the adjudicator will not only have the remit to ensure that the rent complies with the ‘no worse off’ principle and has been fairly prepared but would also be able to set the level of rent. The leased and tenanted pub industry has c3,000 – 5,000 different rent ‘events’ per year and this could result in the adjudicator being involved in, and setting, a high proportion of these rents. We do not believe that this was the original intention of the draft proposals from BIS.

2.3 It is also not clear that the full implications on adjudicating rents is understood within the proposed legislation. The RICS guidance has already stated that comparing tied and free of tied rent is ‘problematic’. There are significant differences in the wording and the approach under the two styles of agreement and it should be noted that there is no current market for free of tie short term tenancies (3-5 years) where the licensee would be free of tie but the pub company would retain the majority of the repairing obligations for the property. It is unclear how an adjudicator would arbitrate on rent levels by comparison to rents for agreements that do not exist in the open market. Equally, the draft legislation relating to the parallel rent assessment only allows for one change between a tied and free of tie rent assessment, namely the cost price of product. However, it does not require costs to be included in the rent assessment for services that are provided to tied tenants but would not be provided to free of tie tenants, including a significant number of SCORFA benefits even though BIS has recognised that these benefits are provided.

3.0 Clause 61 (2) (d) – The inclusion of Temporary Agreements

3.1 Temporary agreements have always played an important function within the industry for both landlord and tenant. A decision to include all temporary agreements within the legislation would be unworkable in practise and result in a higher rate of pub closure both temporary and permanent. This would result in a loss of amenity for many communities and we do not believe that this is the intention of BIS.

3.2 Temporary agreements are used by Pub Companies to keep pubs open and trading in between periods when a pub is let on a substantive agreement be that a tenancy or a lease. The ability to keep a pub trading on such a basis enables pub companies to accept the surrender of an agreement on compassionate grounds or indeed through a change of circumstance for the licensee and this would be more problematic if the pub was likely to close as a result. Furthermore it affords the opportunity for a potential licensee to experience the running of a pub prior to committing themselves to a longer term contractual commitment. At Admiral Taverns we use temporary agreements in this way offering a "try before you buy" style of agreement which is popular amongst many of our licensees. This agreement is used by us proactively to ensure that by the time a licensee signs a substantive agreement they are fully aware of all aspects of the commitment they are entering into and have received some of the training that they require to run a pub effectively should they then elect to commit to a substantive agreement.

3.2 Such agreements have minimal risk to a licensee with even lower costs of entry (typically a small bond and some working capital) and typically only require 28 days’ notice to bring the agreement to an end. As per the BBPA (British Beer and Pub Association) submission we would recommend that a licensee that has been operating a pub for 12 months even on a temporary agreement would automatically qualify for protection under the statutory code thereby alleviating any concerns about the use of temporary agreements to avoid the obligations within the code.

4.0 Clause 61 (1) (b) Who the statutory code safeguards should apply to

4.1 Presently, the wording of the Bill affords the same safeguards for someone making a tentative enquiry into the letting of a tied agreement as to an established licensee or a prospective licensee that is engaged in meaningful discussions with a pub company. Whilst we wholeheartedly agree that those entering meaningful negotiations for a tied agreement should be protected by the legislation we also believe that the safeguards should be afforded to them at the appropriate stage within the process. We currently receive in excess of 5000 enquiries each year with many of these enquiries being entirely speculative and it would be impractical and unnecessary to adhere to the conditions of the statutory code with all of these enquiries. Furthermore a significant number of these potential applicants will approach a variety of pub companies in order to find the pub and commercial terms that suits their aspirations. If each Pub Company was required to fulfil all requirements at this premature stage of enquiry not only would there be significant and unnecessary duplication of work across the industry but the enquirer would be faced with an enormous administrative burden to fulfil their obligations with the legislation.

4.2 We are aware that throughout the discussions held with licensee representative bodies at the drafting stage of the code they recognised the unworkable nature of this specific issue. Along with the BBPA an acceptable form of words was constructed that would work in practise and would ensure the necessary protections for a licensee at the appropriate stage in the process.

5.0 Clause 37 (4) Future amendments to the Statutory Code

5.1 There are insufficient safeguards within the legislation as drafted to prevent future amendments to the Statutory Code arbitrarily. We believe that any amendments to the code should follow due process and as per the Grocery Code be subject to full parliamentary scrutiny and public consultation.

6.0 Summary

6.1 Admiral Taverns is a responsible landlord that enjoys positive and supportive working relationships with the vast majority of our licensees. It is clear that we can only succeed if our licensees succeed and we work hard to provide the necessary support and guidance whilst respecting the fact that our licensee are self-employed business people with the right to run their business their way.

6.2 As stated we continue to believe that statutory intervention is unnecessary given that the voluntary approach is working. This can be evidenced by the improving rating scores in the only robust and independent annual Licensee Survey (him Tenant Track Survey) which sees approval ratings of over 70% across the larger companies and higher in the case of Admiral Taverns (75%). These scores have improved year on year for the last 3 years providing compelling evidence that the issues of the past are being resolved at pace in response to market forces that sees the highest level of competition for licensees to run our pubs.

6.3 Furthermore we do not believe that we should be disadvantaged merely due to the number of pubs that we own and that all efforts should be made to avoid anti-competitive legislation. In this regard we have always felt that a more considered and rationale approach to differentiating legislation was on the style of agreement operated. Traditional tied tenancies are very different to tied leases being shorter in term and less onerous in terms of licensee obligations, with no ability to assign to a third party. It is widely recognised and accepted that the vast majority of the issues highlighted by the most recent and previous investigations into the sector are related to tied leases and therefore in our view differentiation should be based on this factor and not the number of pubs owned.

6.4 That said and as outlined in our opening comments, we now wish to work with government to achieve a timely and workable resolution and to help identify and avoid the significant risks of unintended consequences that would inflict significant and lasting damage to the viability of our pubs and the prospects of our individual licensees. Specifically, regarding the point of arbitrating on rental valuation, this would be open to legal challenge on competition and human rights grounds and would inevitably delay any implementation of a statutory code. We believe that any such legal challenge would result in continued upheaval for the sector at a time when confidence and certainty are required and we do not believe that this is the intention of BIS.

October 2014

Prepared 16th October 2014