Small Business, Enterprise and Employment Bill

Written evidence submitted by Punch Taverns plc (SB 34)

1. Introduction

 

1.1 Punch Taverns plc ("Punch") welcomes the opportunity to provide its comments to the Public Bill Committee (the "Committee") on the Small Business, Enterprise and Employment Bill (the "Bill").

1.2 Punch is a pub company with approximately 4000 pubs; its tenants are usually tied for a variety of alcoholic and non-alcoholic drinks. Punch is committed to treating its tenants fairly and lawfully, and opposes abuse of the tie. Its interests are aligned with those of its tenants: put simply, successful tenants provide success for the pub company.

1.3 Punch welcomes this initiative to help small businesses which have long suffered from ‘red tape’ and the difficulties created by regulation.

1.4 As set out below Punch does however have serious concerns on Part 4 of the Bill and the draft Pubs Code (the "Code") [1] .

1.5 Punch remains opposed to the introduction of the Code and the Adjudicator. If however statutory regulation becomes enforceable, Punch would like to work with the Committee, and BIS, to ensure that the legislation is well drafted and works as intended.

2. Statutory intervention is unnecessary and disproportionate – and as envisaged in breach of the European Convention on Human Rights.

 

2.1 As a preliminary point, Punch rejects the need for statutory intervention as envisaged at Part 4.

Unnecessary

2.2 There is already an effective system of self-regulation for pubs in place; each pub company code is already legally binding as it is included in new pub leases.

2.3 The Government has failed to provide evidence either that self-regulation is not working or that there is a serious imbalance in the relationship between pub companies and tenants which requires intervention. In its consultation [2] , the Department for Business Innovation and Skills ("BIS") relied on unreliable and discredited information to support the need for intervention. [3] Punch submitted a detailed response to the Consultation and does not intend to reiterate its arguments in detail here.

Disproportionate

2.4 Statutory intervention is also disproportionate.

2.5 As recognised in the Explanatory Note to the Bill, the provisions of Part 4 engage the right to property under Article 1, Protocol 1 of the European Convention on Human Rights.

2.6 Punch disagrees that the provisions are "justified and proportionate". The measures are said to put the parties on an equal footing and increase transparency for tenants. Yet:

(i) As above, there is no reliable evidence of a general imbalance in the parties’ relationship (the system of self-regulation having addressed the issues identified by earlier Select Committee reports); and

(ii) The mechanism of parallel rent assessments envisaged by the Bill goes far beyond the objective of transparency (instead creating the basis for an arbitrary and disproportionate value transfer from pub company to tenant – see further below).

2.7 As such, the Bill risks infringing Article 1, Protocol 1of the European Convention on Human Rights.

3. Statutory intervention as set out in the Bill also amounts to abolishing the tie "by the back door" (with serious adverse effects on tenants and the wider economy).

 

3.1 The tied business model provides significant benefits to tenants. It represents a unique opportunity to run a small business, with a low capital entry cost (which allows the use of an asset worth an average of £650,000), reduced risk and substantial support from the pub company. A range of benefits are provided to tenants which are only possible through the economies of scale realised by the pub company.

3.2 BIS’ response to the Consultation explicitly recognised the tie as a valid business model and dropped elements of the original proposal that would have risked eliminating the tie. [4]

3.3 At the time of the Consultation, economic research was carried out by London Economics (for the Government) and by Compass Lexecon (for the British Beer and Pub Association ("BBPA")). The research concluded that the proposals could lead to large scale pub closures. In particular, London Economics acting for the Government concluded that a free-of-tie option would result in up to 1,300 pubs closing, leading to a direct and indirect loss of around 7,000 jobs. Having expressly recognised the risk of proceeding with the free-of-tie option [5] , it now seems disingenuous for BIS to proceed with the provisions of the Bill which seemingly re-introduce that very same mechanism.

3.4 Punch welcomed BIS’ change as regards the mandatory free-of-tie option but, having read the Bill and the proposed Code, is now concerned that the current provisions would reintroduce mandatory free-of-tie ‘by the back door’ (with the same effects on pub closures, employment and the wider economy).

4. Overview of Punch’s concerns

 

4.1 Punch’s core concerns are around:

(i) The operation of parallel rent assessments;

(ii) The discriminatory treatment of large pub companies;

(iii) The scope of the Bill (in particular the inclusion of tenancies at will); and

(iv) Cost and penalties

(v) The requirement for information on assignments.

4.2 Each of these is outlined further below.

4.3 Punch also provides detailed comments on specific clauses of the Bill in the Annex.

5. The parallel rent assessment provisions are unclear and could undermine the whole tied business model – in breach of the European Convention on Human Rights.

 

5.1 The parallel rent assessments are set out in Clause 36(6) of the Bill.

5.2 It is unclear how the assessments are intended to work. In particular:

(i) It is not clear how a parallel rent assessment would (or could) be calculated; and

(ii) Nor is it clear exactly what role the Adjudicator should have in relation to parallel rent assessments.

No clarity as to how a parallel rent assessment should be performed

5.3 The Bill should not provide for parallel rent assessments without a greater understanding of what is involved in such assessments.

5.4 A direct comparison of tied and free-of-tie rents is not as simple as it would first appear or as appears to be envisaged in the Bill. RICS guidance expressly provides that "comparability between public houses held on different lease terms and with different supply terms is problematic, particularly between the tied and non-tied sectors". [6] It is wholly misleading to say that "the parallel rent assessment does not need to be complex". [7]

5.5 A proper rent assessment would need to reflect a myriad of factors including the parties’ risk, the different lease terms available, the repairing liabilities and the intangible benefits (such as credit terms, shorter rent payment periods, low or no interest loans) enjoyed by tied tenants.

5.6 The cost of beer is a key part of the assessment as envisaged by BIS but there is no "free-of-tie price" for beer for a parallel rent assessment. This ‘free-of-tie price’ will depend on a wide range of factors specific to the pub and the tenant in question, such as credit worthiness, volume, delivery terms, and product mix.

No clarity as to the role of the Adjudicator

5.7 The mechanics of the parallel rent assessment are also unclear from the Code.

5.8 BIS has suggested to Punch that parallel rent assessments would be for "information only". And yet, Punch understands that the parallel rent assessment may form the basis for arbitration requests and for the Adjudicator subsequently to determine the rent in individual cases.

Adverse consequences

5.9 The combination of a naïve methodology as applied through arbitration and an Adjudicator would effectively re-introduce the mandatory free-of-tie option – with all the adverse consequences as recognised by BIS in its response to the Consultation.

Breach of the European Convention on Human Rights

5.10 Furthermore, by allowing the Adjudicator to intervene in individual rent disputes, and enforce a transfer of value from pub company to tenant, the parallel rent assessments represent a direct interference with the pub companies’ property rights as protected by Article 1, Protocol 1 of the European Convention on Human Rights.

5.11 The proposed mechanism cannot be justified in the public interest: as noted above, there is no evidence to demonstrate that there is an imbalance between pub companies and tenants in need of re-balancing and the proposed transfer of value would not in any case be a proportionate means of achieving such aim.

5.12 If the issue is transparency, there are less restrictive options which would not allow the Adjudicator to intervene in individual rent disputes.

6. Discriminatory treatment of large pub companies will create a two tier market.

 

6.1 Punch would also like to draw the Committee’s attention to the two tier system created by the Bill in distinguishing between pub companies according to the number of tied pubs (see Clause 60).

6.2 There is no justification for such discrimination and it would distort the market. This concern was highlighted by RICS in its response to the Consultation ("we perceive that this 500 pub threshold could result in the creation of a two tier market"). [8]

6.3 The 500 pub threshold is an artificial break point which would exclude an estimated 33,000 pubs from regulation out of a total of 48,000 in the UK.

7. Scope of application of the Bill should not extend to Tenancies at Will.

 

7.1 Tenancies at Will should not be included as envisaged under Clause 61(2) of the Bill.

7.2 Tenancies at Will agreement help tenants as they as they allow flexibility and provide little or no cost of entry to prospective tenants who would not be able to enter into a more formal agreement.

7.3 These temporary agreements play an important role in keeping pubs open until a formal substantive agreement is ready to be put in place. The formal substantive agreement will usually be subject to capital expenditure by the pub company.

7.4 Including tenancies at will within the scope of the Bill and the Code would impose an unsustainable burden on pub companies and lead to pubs closing down rather than being kept open during the transitional period.

7.5 Punch estimates that extending the Bill to Tenancies at Will, would lead to the immediate closure of an estimated 5-8% of tied pubs, or 1100-1750 pubs, together with the associated loss of jobs.

7.6 If the Committee is concerned that temporary agreements of this nature could be exploited by pub companies to avoid regulation, this could be addressed by way of an anti-avoidance provision. Punch understands that suitable wording has been proposed by the BBPA.

8. Costs and Penalties

 

8.1 The cost burden associated with the Adjudicator and the Code has not been fully considered. Pub companies will be required to pay: (i) an annual levy towards the Adjudicator’s expenses; (ii) the reasonable fees and expenses of the arbitrator in cases of arbitration; and in certain cases, (iii) the costs of the investigation and/or (iv) financial penalties.

Levy funding

8.2 Clause 54 allows the Adjudicator a very wide discretion to determine the amount of the levy this should be based on the size of the pub company. Clause 54(5) should specify the criteria used to allocate the amount of levy and should be based on the number of pubs a pub company owns. Furthermore, the option to refund any surplus under Clause 54(9) should be an obligation to do so.

Costs of arbitration

8.3 The Bill provides limited protections to pub companies in cases of "vexatious" referrals or complaints (Clause 42(6) and Clause 50(2)). These clauses are insufficient to protect pub companies against the costs of defending multiple speculative and unfounded requests for arbitration or investigation and should provide for the pub companies to be compensated for the reasonable costs of defending such claims. See detailed comments in the Annex.

Financial penalties

8.4 Clause 49 should expressly limit the financial penalty which can be imposed rather than leaving this to the Secretary of State. The amount should be significantly less than the penalties permitted for competition law infringements (which are inherently more serious in nature).

9. Requirements for information should apply to sitting tenants on assignments.

 

9.1 Finally Punch would like to comment that as currently drafted the Bill and the Code do not place a duty on the tenant assigning its lease to another prospective tenant to provide information on the business it is selling.

9.2 Punch believes that the greater level of due diligence is a good thing and should apply equally to tenancy agreements, lease agreements and lease assignments. In the case of lease assignments, the onus for this information requirement should not be placed on the pub company as the assignor will have most of the information that the assignee requires.

9.3 Consistent with the Bill’s objective of increased transparency for new tenants, the Bill and the Code should oblige the sitting tenant who is assigning its lease to provide suitable information to the assignee.

10. Conclusion

 

10.1 Punch is concerned that the Bill as drafted will lead to serious, unintended consequences and threatens the future of the tied business model. The unwelcome level of uncertainty risks pub closures and job losses – the opposite of what should be intended from a Bill meant to assist small businesses and create employment.

October 2014

Annex

Punch comments on individual clauses

In this Annex, Punch outlines its comments on individual clauses of the Bill, in addition to the core points above.

Clause 36(3). The principle of fair and lawful dealing should be reciprocal and apply to both pub companies and tenants. The same concern applies to the information requirements in Clause 36(5)(a) (see further above in relation to assignments).

Clause 36(4). This clause implements the discriminatory treatment of larger pub companies as highlighted in the submission. If the ‘no worse off’ principle is to be implemented, it should apply to all pub companies.

How to achieve the ‘no worse off’ principle is however fraught with difficulty. The Committee should ensure that the provisions referred to in this clause do not become a means of re-introducing the mandatory free-of-tie option. In particular, the parallel rent assessments envisaged by Clause 36(6) appear to be an ill thought-out means of achieving this principle. By seeking to rebalance the fundamental relationship between pub companies and tenants and effect a disproportionate value transfer to tenants, the provisions risk infringing the ECHR.

Clause 36(5)(f). This clause is too wide and risks introducing unnecessary and disproportionate measures into the Code. The scope of the Code should be limited now, with the option to introduce amendments if necessary in the future on the basis of the review provisions set out at Clause 37.

Clause 36(6). As noted above, Punch has major concerns about the operation of this clause. The parallel rent assessments risk introducing a free-of-tie option by stealth – despite BIS’ rejection of the initial proposal due to concerns over pub closures and job losses. The vague reference to "functions" which may be conferred on the Adjudicator should be replaced with clarity as to how the Adjudicator proposes to use the parallel rent assessment.

Furthermore, by limiting the parallel rent assessments to the larger pub companies, the Bill again enforces the creation of a two tier market

Clause 37. As drafted, this clause does not allow for proper consultation. This contrasts with the Groceries Code Adjudicator Act 2013 which obliges the Secretary of State to consult a prescribed list of stakeholders in carrying out a review. The same concern applies to Clause 56 of the Bill.

At Clause 37(5), the Secretary of State’s report should also consider whether a Code is still necessary and appropriate.

Clause 38(3) and (6). These clauses allow for retrospective claims which should be dealt with under the old self-regulation regime. Agreements will still be brought within the scope of the statutory regime as they come up for renewal.

Clause 39. The Bill, not the Code, should determine which provisions are subject to arbitration. The arbitration function should deal with behavioural issues and breaches of the Code, not rent disputes. Rent disputes should be specifically excluded.

Clause 42. This clause should expressly provide that the parties can appeal the decision of the arbitrator on the grounds set out in the Arbitration Act 1996 (consistent with the equivalent provision in the Groceries (Supply Chain Practices) Market Investigation Order). This would be of particular importance if the arbitrator nominates the rules of an arbitral body which does not allow appeals on points of law under Clause 42(5)(b).

Clause 42(6). This clause is insufficient to protect pub companies against the costs of defending multiple speculative and unfounded requests for arbitration by tenants. As drafted, it encourages tenants to bring speculative requests for arbitration. The drafting should be extended to cover claims which have no prospect of success even if they do not meet the ‘vexatious’ standard. Furthermore, where claims are unfounded or vexatious, the tenant should have to pay the reasonable costs of the pub company as well as the arbitrator.

Clause 49(6). The Bill should set out the maximum financial penalty which the Adjudicator can impose following an investigation rather than leave this to the Secretary of State. The maximum amount should be significantly below the maximum penalty for breaches of competition law (10 per cent. of turnover) which are inherently more serious in nature.

Clause 50(2)(b). As with Clause 42(6), this clause provides insufficient protection against the costs of defending unfounded or vexatious complaints. If a complaint is found to be vexatious or wholly without merit, the complainant should be required to compensate the pub company for the costs incurred in defending itself against the complaint.

Clause 52(4). The obligation on the Adjudicator to consult before publishing guidance should oblige him/her to consult any affected person (and not simply who the Adjudicator thinks appropriate).

Clause 54. The Adjudicator has a very broad discretion in terms of determining the amount of the levy for different pub companies. Clause 54(5) should specify that the criteria used to allocate the amount of the levy should be based on the size of the pub company. Furthermore, the permission to refund any surplus in Clause 54(9) should be amended to ensure that this is mandatory rather than optional.

Clause 61(1)(b). This extends the protection of regulation to ‘window shoppers’, i.e. individuals who contact the pub company with no serious intention of taking a pub. Punch receives thousands of enquiries every year of which only a small percentage result in an agreement to take on a pub. The scope of this clause would impose an excessive burden on Punch with limited benefit for tenants and prospective tenants. This clause should also clarify that advisors to the principals in the negotiation are not themselves "party" to the negotiation and do not benefit from the provisions of the Bill and the Code.

Clause 61(2)(d). As noted above, tenancies at will should not be included within the scope of the Bill. This will impose a disproportionate burden on pub companies and lead to the immediate closure of 1100-1750 pubs which would otherwise have been kept open on the basis of temporary agreements. Suitable anti-avoidance provisions could be drafted to stop parties using temporary agreements to escape the regulatory regime.

Clause 62(1). The definition of "parallel rent assessment" refers to rent which would be payable if the tenant was not tied "assuming that the tenancy is unchanged except in respect of terms relating to such ties". Once again, the Bill gives a misleading impression that the parallel rent assessments will be a simple mechanism based on a straightforward comparison of rents with and without the tie. As noted above, this completely disregards the level of complexity involved in comparing tied and free-of-tie rents.