Small Business, Enterpise and Employment Bill

Written evidence submitted by Spirit Leased -Spirit Pub Company PLC (SB 46)

1. Overview of Spirit Pub Company PLC

1.1 Spirit Pub Company plc owns and operates 1227 pubs across England, Scotland and Wales. Our managed division consists of over 750 branded pubs including the award winning Fayre & Square and Flaming Grill brands alongside the renowned Taylor Walker local pubs and Chef & Brewer country pubs. We currently employ over 16,000 people and have been awarded 16th place in the Sunday Times 25 Best Big Companies to work for in 2014. We currently have 1400 apprentices training in our pubs and are recognised with the Star Train Gold Standard for our work experience programme and are part of the Trailblazers Phase 2 group of companies designing the apprenticeship standards for the future.

1.2 Spirit Leased is the leased and tenanted division of Spirit Pub Company and currently operates 433 pubs with independent operators on lease or tenancy agreements. Our vision is to become the No 1 Hospitality Company in the UK and therefore in Spirit Leased our mission is to continue to have strong, long term and mutually beneficial relationships with our Licensees and provide compelling reasons for Guests to visit our pubs. Eighty experienced and high calibre multiple pub operators operate a quarter of our pubs. Spirit Leased has employed a Code of Practice Compliance Manager since May 2012; we have no recorded breaches of our Code or any cases at PICAS or PIRRS.

1.3 Whilst we fully support self-regulation and believe that it is working, we understand and appreciate the requirement for a Statutory Code and Adjudicator. In this paper we have outlined some specific concerns regarding the drafting of the Small Business, Enterprise and Employment Bill in three key areas – Definition of Tied pub, Parallel rent assessment and assignments. We make some recommendations for improvements to the drafting and are keen to see that the proposed new Statutory Code and Adjudicator work effectively and provide a sensible and workable solution for all stakeholders in these three areas in particular.

2. The Definition of a Tied Pub (Clause 59) and a Tied Tenant (Clause 61 – (2b))

We are concerned about the definition of a Tied Pub and Tied Tenant as proposed in the Bill. Tenancies at Will (TAW) provide practical solutions to temporary problems in some pubs and in our view the inclusion of TAW temporary tenants in the bill is seeking to address a problem that does not exist in practice.

2.1 Background – why we use TAW agreements

We only use TAWs as temporary solutions to keep pubs open and trading and do not use TAWs as a way of avoiding our obligations under the current Industry Framework Code (IFC); neither would we under a Statutory Code.

TAW agreements are mainly used in the following circumstances:

a) Where we do not currently have a permanent tenant and we are recruiting for a pub vacancy or a rapid temporary transfer is required to keep a pub open if a permanent tenant leaves unexpectedly such as loss of personal licence; breach of agreement; bankruptcy; death; criminal prosecution.

b) Where a pub is to be sold with vacant possession and the best solution is to keep the pub open and trading whilst the sale progresses and is finalised.

c) Where a pub is being assessed as to whether we should invest in it or transfer it to our managed business; we would not wish to recruit a permanent tenant to take the pub until these decisions have been finalised.

d) Where we have a tenant who wishes to take a pub on a substantive agreement and they are undertaking the training and recruitment Code of Practice processes so that a substantive tenancy or lease agreement can be granted to them. This allows the pub to remain open with the new operator and enables both parties the time to meet all of our respective obligations both legally and under the Code of Practice.

As additional context, 96% of the Spirit Leased pub estate is occupied on a substantive agreement i.e. long term tied tenancy or tied lease. Our current estate has a total of 15 TAW agreements in place (Aug 2014) as detailed below:

· TAWs converting to Substantive Tenancy & Lease with current operator: 2

· TAWs in place due to disposal of the site: 0 (5 - July 2014)

· TAWs to convert to managed division: 2

· TAWs whilst review of site being undertaken: 0

· TAWs whilst we recruit a substantive tenant: 11

2.2 Advantages and disadvantages

Extensive or long term use of TAW agreements have real disadvantages because:

a) We do not have the security of income afforded to us by a permanent tenant and as a result we do not invest in these businesses on this agreement (we would not receive sufficient return on investment).

b) Costs normally borne by the tenant sit with us in the areas of compliance certification/testing, dilapidations and occasionally business rates.

c) Our shareholders perceive value in our business based on the number of permanent tenants we have operating our pubs; a high proportion of TAW or closed pubs has a negative impact on the confidence of investors.

Any closure of a pub is unwelcome and we believe there is real risk that more pubs would be closed if TAWs are included in the definition of tied pub. The unintended consequences of this are:

a) Local communities lose an amenity to be replaced by the risk of an eyesore and the risk of vandalism, fly tipping and squatting that occurs when a property is left empty and boarded. Keeping a pub open via TAW agreement can mitigate these risks.

b) It will become harder for new entrants to take on a tenancy as pub companies will limit tenancies to substantive agreements only and not allow a new entrant to dip their toe in the water first.

c) Closed pubs are harder to re-let in terms of arrangements for prospective tenants to visit and to evaluate the real business opportunity.

d) Re-opening becomes costly in the areas of utility reconnection, compliance retesting, clearing up external vandalism, undertaking dilapidations; much of this cost would rest with the incoming tenant.

e) Closed pubs have a negative impact on the supply chain. If a pub is closed then it won't generate the requirement for example to buy food from local wholesale suppliers. Closed pubs would also mean a reduction in tax revenue - Local authorities would see a reduction in business rates as pub companies claim empty property relief, businesses would not employ staff leading to a loss in income tax and national insurance.

Any tenant on a TAW agreement negotiating with us to take a lease will fall within the definition of a "tied pub tenant" under Section 61(1)(b) and so have the protection of the Code since they will be a party to negotiations relating to a prospective tenancy or lease. The Code obligations will already have begun whether they are trading the pub or not.

It is also important to note that temporary management companies often take TAW agreements to provide a temporary management service to a pub company. The management company does not need the protection outlined in the Bill, nor do they seek it. It would make it very unwieldy for the pub company to work alongside these companies and still comply with the Code.

2.3 Conclusions and recommendations regarding TAWs

TAWs meet a genuine need. Few pub companies would want a TAW to continue beyond 12 months; we accept that the case for a TAW beyond this timescale is questionable. We currently only have four TAWs that have been in place longer than 12 months and will either shortly let these on substantive agreements or divest them.

As far as we can see, there is no evidence to suggest that the complaints about conduct by pub companies relates to tenants on TAWs.

If TAWs are still to be covered by the Code, an exemption is recommended so that a TAW can remain in place for up to 12 months. This would enable pubs to remain open and also offer a solution to the concerns identified by the consultation.

We would suggest the following wording is added to Section 61(1)

In this Part a "tied pub tenant" means a person:

(a) who is the tenant of a tied pub other than a temporary management company; or

(b) who is a party to negotiations relating to the prospective tenancy of premises which are, or on completion of the negotiates are expected to be, a tied pub.

"temporary management company" means a company whose business involves the temporary operation of public houses without the intention of entering into a more permanent form of tenancy

We would also suggest the following changes are made to the definitions at Section 61:

"tenancy" means a tenancy created either immediately or derivatively out of the freehold, whether:

(a) by a lease or sub-lease,

(b) by an agreement for a lease or sub-lease,

(c) by a tenancy agreement or sub-tenancy agreement' or

(d) in pursuance of a provision of, or made under, an Act'

and includes a tenancy at will

" tenancy at will" means a tenancy at will or series of tenancies at will granted to a tied pub tenant (whether or not jointly with another person) that has continued for a period exceeding 12 months.

3. Parallel rent assessment

Clause 62 (1) The definition of a parallel rent assessment for tied tenants – the assessment of the rent which would be payable by a tied pub tenant to the pub-owning business which is the landlord of the tied pub if the tenant were not bound by any product or service tie (assuming that the tenancy is unchanged except in respect of terms relating to such ties)

Clause 36 (4) Provisions of the Pub Code…are consistent with the principle that tied pub tenants should not be worse off as a result of any product or service tie

Clause 36 (5c) make provision about the information that such assessments must contain and how they are to be calculated and presented

Clause 36 (5d) specify that such assessments must be conducted in accordance with provisions of documents specified in the Pubs Code

3.1 Background and recommendations for parallel Free of Tie assessments

Clause 62 (1) and Clause 36 (4), in our view, take a too simplistic view of this critical area and we would ask that the definition in Clause 62 (1) "assuming that the tenancy is unchanged except in respect of terms relating to such ties" be removed. We recommend this because a parallel rent assessment created with the assumption that the tenancy is unchanged except for terms relating to such ties is basic in understanding; a tied agreement does not simply become a Free of Tie (FOT) agreement solely from the removal of the product tie. In its current format the Bill takes no account of the ownership of the pub asset itself and as such the ability and freedom to operate that property as a commercial entity whether that is on a tied basis or as a pure commercial property rent. We would therefore recommend that as per Clause 36 (5c) the following be recognised to accurately deliver Clause 36 (4):

a) The ownership of the asset by the pub company and therefore the ability or the need to charge full market commercial rents (not restricted by RICS guidance) when a tie is not in place.

b) The increased costs of entry associated with a general commercial property relationship.

c) Upwards Only Rent Reviews applied by head landlords would also be passed on to the tenant (normally absorbed by the pub company).

d) The cost benefits normally received through SCORFA under a tied agreement would be withdrawn and therefore a higher cost for an individual operator seeking the same on the open market.

e) The withdrawal of any pub company investment in their own asset.

This leads us to the view that the parallel rent assessment template provided in the Pubs Code is also too basic and as outlined in Part 4; 36: The Pubs Code point 5(d) specifies that such assessments must be conducted in accordance with the provisions of documents specified in the Pubs Code. We would recommend that the template is adapted to accurately assess the cost differences between a tied tenant and a tied lessee and an assessment of the real difference a FOT model depicts are properly shown. There are additional costs that would be included if the assessment were to really reflect a true FOT scenario:

a) Cost of capital in terms of a business loan or mortgage for the same business.

b) Cost of the deposit.

c) Attainment of business services (SCORFA) at a higher cost than that offered by the pub company and or the lack of utilising SCORFA benefits to grow the business.

d) Higher costs in terms of insurance as an individual.

e) Higher costs of gaining investment capital and securing the work as an individual instead of from the expertise and buying power of the pub company).

If the parallel rent assessment were to include the above we would see a true and accurate reflection of what the real difference is between tied and FOT scenarios and this would be a fair interpretation of whether a tied pub tenant was worse off as a result of any product or service tie. Without this understanding and inclusion, we believe that the proposed rent assessment template in its current format would always show that a tenant was worse off with a tied agreement.

3.2 Clause 36 (6) provide parallel rent assessments in relation to their tied pub tenants in specified circumstances and in connection with such provision a) may confer on the Adjudicator functions in relation to parallel rent assessments

We would also reference our concern with Clause 36 (6a) outlined above. Parallel rent assessments are there to provide a tenant with the information as to whether they would be paying more under a tied agreement vs a free of tie arrangement; it is there to provide transparency so that a tenant can make an informed decision as to whether to take a tied agreement or not. It is not there to dictate what a pub company can charge or what agreement a pub company can offer. We would like to seek assurance and clarification that the Adjudicator would not be given the rights to set the rent level for individual agreements or the terms. This would have unintended consequences for the sector and would appear to go beyond the reasoning for the provision of a parallel rent assessment.

4. Assignments

Clause 36 (f) impose other obligations on pub-owning businesses in relation to their tied pub tenants.

4.1 In reference to this and the draft Code it appears that Part 10 of the Code; Assignment of a lease (42) if the tenant can demonstrate that they have provided the prospective assignee with the information at Part 6 of this Code the pub owning business must not unreasonably withhold consent to a request for assignment.

4.2 We would first ask that an inclusion be added to require the tenant wishing to assign the lease be responsible for providing accurate statements of accounts and VAT returns for the last three years.

4.3 Secondly, most leases and tenancy agreements that are assignable set out in detail the circumstances in which the pub company can reasonably refuse consent or attach conditions (such as the provision of a rent deposit or a guarantee). In the Bill, the way in which this provision is worded suggests that the only relevant condition is that the tenant has provided the relevant information to the proposed assignee when in practice there may be a number of reasons why the landlord will be perfectly entitled to refuse consent (in law). This may include serious breaches of the lease, concern over the covenant strength being offered, the suitability of the proposed assignee and his experience of running a pub and concern that the proposed use may breach the user covenant in the tenancy agreement. The provision in the Code should make clear that this is without prejudice to the landlord's (the pub company) right to withhold consent or make consent conditional under the terms of the lease.

4.4 Finally, we believe that a formal process in which to amend the Pubs Code at a later date would be beneficial to all parties involved. This would enable a full consultation and Parliamentary scrutiny to assess the effectiveness of the Code in its current format. This process will also provide stability for all those working within the Statutory Code.

5. Summary

Spirit Pub Company is committed to fair and lawful relationships with our tenants and the recommendations outlined in this submission are done so in the conviction that the Statutory Code and Adjudicator provide a workable resolution for all parties involved. We will continue to participate in further consultation undertaken in respect to the Statutory Code to reach this end.

October 2014

Prepared 29th October 2014