Small Business, Enterpise and Employment Bill

Written evidence submitted by Fair Pint Campaign (SB 50)

Fundamentally Fair Pint Campaign welcome the Bill and Code but have grave reservations about its lack of content. We appreciate the legislation may offer a foundation for future development to a material and meaningful resolution but as it stands we envisage no significant change and a continuation of the UK's pub market decline.

In general terms the Bill and Code emulate the current self regulatory regime, which has already been accepted by Government to have failed. The one fundamental difference is that the enhanced part of the code contains a Government proposal, the parallel rent assessment, which seeks to deliver the principle of fairness in the relationship between larger pub owning businesses and their tied tenants. This PRA on its own can not deliver the Government commitments - fairness and to ensure a tied tenant is no worse off than if they were free of tie.

We do not doubt that the pub companies will seek to have PRA omitted from the Bill by amendment. We would like to stress that without MRO or PRA then the Bill contains very little at all of interest for tied tenants and will ultimately fail to deliver any of the Governments commitments. The Bill will basically become Version 6 of the self regulatory Industry Framework Code, which failed for an number of reasons the primary one being it did nothing, and had no aspiration, to rebalance the risk and reward between landlord and tenant and permitted the pubcos to continue to take an excessive and unfair proportion of a pubs profits to the detriment of the tied tenant.

The Public Consultation revealed that 96% of the respondents to the online survey supported Government regulation and 67.6% agreed that the best way to deliver the Government commitments was to introduce a Market Rent Only option. This support for Market Rent Only option seems to have been largely ignored by Government. In contrast, only 29.6% supported a measure to ensure that is a tenant pays more for drinks they must be charged a lower rent (the parallel rent assessment proposed) and 52.6% were in favour of the statutory code applying to all pub owning companies, instead of those with over 500 pubs. Government seemed to have listened to the minority when making their rent assessment proposal and very marginal majority proposing the code, at least in some part, applies to all.

Like the Bill is co-dependent on the Code, the parallel rent assessment (PRA) relies on the existence of an Market Rent Only option (MRO). The initiative is to empower the tenant, currently in a subservient and financially weak negotiating position, in order to restrain a multi million pound pub owning business from taking advantage of their dominant position over a much smaller, unsophisticated, business by abusing the terms, unique to tied agreements to the other parties detriment.

That is not to say all pub owning businesses are abusing their position. St Austell brewery, we are told, have an exceptional relationship with their tenants. If true we consider this is a relationship all pub owning companies would seek to emulate and improve upon. The likelihood is a St Austell tenant if offered a MRO option would remain in their tied agreement. Evidence has been presented that the tenants of other bigger pub owning companies may not enjoy the same, apparently, symbiotic relationship and as such may take comfort in the existence of a MRO option.

No organisation has proposed the PRA on its own. Both landlord or tenant organisations know it will be largely ineffective as it is both mechanical and time consuming - that is why the pub owning businesses and their parliamentary supporters are allowing it to slip by relatively un-resisted.

Put simply, the Market Rent Only option means a tied licensee can choose whether to remain in the same tied agreement, paying extra for tied products and a lower rent to compensate for them or swap on to an agreement under which they simply pay a market rent and acquire products from any source if they consider the tied rent is not fairly reflecting the tied product prices.

We would like to reiterate our original proposal based on the recommendations of four all party select committees.

A statutory code should be introduced, policed by an independent Adjudicator, containing a Market Rent Only option. This code should apply to all pub owning businesses with more than 500 pubs (not 500 tied pubs).

This ensures the tied tenants of the pub owning businesses with a threshold market share are protected by statue. Regional family brewers are exempt due to their size and will be influenced by market forces.

Government seem to have rejected this proposal largely on the pub owning businesses stated grounds that it may create a two tier system. There are two obviously and simple counter arguments to this contention.

1. The Government proposal itself has a core and enhanced code - so would create a two tier system anyway.

2. The pub sector is not single tier now - there are a multitude of tiers, tied and free of tie - freehold, managed, leased, tenanted - short leases, long leases - variations in discount levels and lease terms. This proposal for an MRO and a 500 statutory threshold simply rebalances the equilibrium allowing all tiers to operate on a level playing field.

We stand by this proposal.

Turning to the Bill itself. We have a number of additional minor points which may assist the committee in considering its content.

We address each comment as it relates to the paragraph numbering in the proposed Bill :

36(3) There appears to be no definition or guidelines to the underlying principle of "fair and lawful dealing". We would suggest this is going to be the subject of great debate and dispute and would suggest a stronger and clearer principle statement. As things stand the self regulatory codes all contain an underlying 'Minimum Obligation' that "All contracts will be fair, reasonable and comply with legal requirements.". The pub owning businesses have all agreed to this wording which, despite being difficult to enforce due to the constraints upon the regulatory body, seem stronger that that currently proposed in the Government proposal.

36(4) We would assume an expectation that ALL tied tenants should be no worse off than if they were free of tie. The wording in this provision seems to imply, assuming brewers are to be covered by the code, that it is acceptable for their tenants to be worse off. This seems contrary to the Government commitment and grossly unfair.

36(5) "The Pubs Code may.....". The use of the word "may" offers no comfort at all as it offers no commitment at all. The Bill should be conferring an obligation that certain terms 'will' be contained within the Pubs Code.

36(6) as above. Our reservations in respect of the PRA should not be misinterpreted as a dismissal of the principle. A PRA can be a very useful tool to a tenant considering a MRO option, their circumstances and profitability tied and free of tie but these should be hand in hand with a remedy within the tenants control (MRO) should they determine that the combination of PRA and any other unquantifiable considerations does not result in fair tied terms. We would not want to see this provision removed as it is an essential component to demonstrate the whole picture of fairness and with out it the Pubs Code is little more than an abbreviated self regulatory code covering some peripheral issues but once again missing the main issue of contention and dispute.

We are somewhat surprised that PRA is not defined in the draft Bill 'Interpretation' section and would suggest this would be a welcome clarification.

We would proposed an additional provision - 36(7) - this provision would largely mirror 36(6) but would replace the wording 'parallel rent assessment' with 'market rent only option'.

37 If the draft Pubs Code is to remain largely unchanged then we will see the accelerated sale of pubco pubs for alternative use, what many see as asset stripping the nations heritage. Punch and Enterprise alone have divested in a third of their pubs (over 5,000) in four years to 2012. This exercise has accelerated since. No one argues we have lost about 10,000 pubs in 10 years. We estimate a two year opportunity to maximise the pub disposals without offering tenants a MRO option before sale will see thousands more closed. The pub companies will be arguing for a longer period before review to maximise their efforts. Conversely if MRO is included in the Bill then we believe, given the Governments reservations, an opportunity to review its immediate affects would be encouraged by the pub companies. Also, consider that no organisation has offered their support of the Governments proposed parallel rent assessment on its own but MRO has received overwhelming support by all but those who perceive they would benefit from its absence. With the later in mind, depending on the code content, it seems both camps would welcome a shorter review period. The review period should be annual to assess the evolving effects or failings of the Pubs Code. After a period of say 3 years of annual reviews the review could be conducted on a rolling 3 yearly basis as proposed.

38 We very much welcome this provisions and subject to the over riding principle "fair and lawful dealing" being strengthened we consider it may be influential in the longer term. Clearly we again face the problem of time - how long would it take for a determination by the Secretary of State following a referral on inconsistency grounds ? What the Code lacks is an effective and immediate remedy, this could be delivered with an MRO option. A tenant finding themselves in an unfair tied relationship need not refer the matter to an Adjudicator or the Secretary of State, they can implement the MRO and the new market rent, reflecting the relaxed terms of trading, can be negotiated or determined by a third party, at a later date and back rent paid to the date of the MRO notice. Fundamentally this gives the pub owning business an opportunity to amend and represent their tied agreements on tied terms that may be considered by the tenant to be fair and mutually beneficial.

39 One of the principle problems in the industry is the time consuming exercise of referral to third parties in the event of dispute. Tied agreement terms can be used to restrict choice and/or increase product prices resulting in tenant failure within a few weeks. If another referral mechanism is to be introduced, as proposed, it must be accompanied with some kind of powers to freeze product choice and price until the determination is concluded. This power may be conferred in 38 but we doubt the Secretary of State will be able to make regulations necessary within a period of a few weeks.

39(6)(b) Whilst we appreciate and accept an Adjudicator may need to 'subcontract' their responsibilities, it is vital that the issue of rents does not end up back in the hands of a small group of conflicted surveyors claiming to be able to offer an impartial position. Rob May, National Rent Controller of Enterprise Inns was chairman of the specialist group dictating rent assessments on pubs and still remains a member of that group alongside other surveyors who derive a large proportion of their fees from the pub companies and brewers (is it any wonder when they collectively own about 50% of the 50,000 pubs in the UK). The RICS were asked by the select committee and Government in 2010 to reconsider the pubs rent assessment guidance document as it had been acknowledged that there were some fundamental failings in the guidance interpretation. No action has been taken to rectify this situation. The RICS have been asked to confirm that if a pub valuation is conducted appropriately the resultant tied rent should represent an amount that leaves the tied tenant no worse off than if they were free of tie. The RICS have declined to comment. It is essential that the Adjudicator does not appoint surveyors to arbitrate the dispute with this level of organisational uncertainty and the influence of conflicted surveyors persists within the profession.

40(2) Timing of referral 21 days - the tenant can be forced into financially instability in days and collapse in weeks by simple restriction of choice and/or price permitted by the terms of the tied agreement. This circumvents any protection intended by the Landlord and Tenant Acts. As mentioned earlier an immediate and effective remedy, neutralising the powers uniquely made available in tied agreements is needed if the tenant is to stand any chance of continuing to trade whilst awaiting a determination. MRO offers such a remedy.

41 Does this mean that if a rent review arbitration (through the standard lease procedure or PIRRS) has already begun a tenant can not refer the matter to the Adjudicator ?

49 (5) There is no apparent definition of the "Consolidated Fund".

51 (and more generally) Terminology / definitions - we believe it is important to make the definitions clear, e.g. where the Bill reads 'tenant' this does not preclude "lessee".

57 If the Bill does not contain an MRO option we foresee very little changing and the work of the Adjudicator would be fairly ineffectual. The danger is that the failure of the Bill and Code to effect the necessary changes will be seen as a failure of the Adjudicator and lead to their abolition. In fact, like a police force without meaningful laws the Adjudicator would be rendered toothless and inconsequential much the same as the self regulatory regime was. This is would be a failing of the Bill and Code not the Adjudicator.

59(5) Ties are not limited to the sale of alcohol. Tenants can be tied on non alcoholic products and indeed bound to take certain services all at unregulated prices. Condition D should read "is that the tenant of the premises is contractually obliged to buy from the landlord, or from a person nominated by the landlord, some or all of the products to be sold at the premises and / or bound by any tied services."

60(1) The current wording would appear to exempt companies from this definition. This should not be restricted to "person" - it should be any "entity" of one or more tied pubs.

60(2)(3) The original proposal was for the Pubs Code to apply to any pub owning business with more than 500 pubs. The introduction of the wording "tied pubs" is not welcome. The 500 threshold we supported was founded on a market share of all pubs, being about 1% of all pubs. Potentially a pub owning business could have thousands of pubs and only 499 tied and be bound by no regulation, or under the current proposal only regulated by the core code. Companies such as Fullers and Shepherd Neame are intent on expanding their managed portfolios, they buy tied pubs and 'encourage' the tied tenant to leave. This in itself should not be discouraged but we should ensure that once a company has a greater market share their tied tenants are not ejected unfairly using tied terms. If the current proposal, of 500 tied pubs, remains this safeguard is removed. The incentive should be introduced, if a company wishes to avoid the cost of compliance they should not expand beyond 500 pubs. We envisage owning more than 500 pubs the company would have a multi million pound turnover, Fullers and Shepherd Neame already turnover £288m and £139m respectively with well under 500 pubs, compliance costs would therefore be relatively negligible if they expand beyond 500.

60(5) There will be many attempts to subvert the Bill and Code should it be implemented with meaningful provisions capable of effectively delivering the Governments commitments. One method of overcoming regulation may be by selling ownership but retaining tie - contractual obligation to purchase from someone other than the landlord and not nominated by them. Heineken have just sold 111 pubs to Admiral but retained the tied terms themselves. Heineken (formerly Scottish and Newcastle) have done this before and in the late 1990's and early 2000's sold their entire estate to various other banks and pubcos retaining the tied terms for themselves on about 2,000 pubs. The Secretary of State must be given as much latitude as possible to react to any efforts to circumvent the principles of the legislation.

62 Code says - 'Tied tenant' defined in legislation it does not appear to be. 'Tied pub tenant' is defined in the Bill. A small point but the Bill and Code should be using the same phraseology.

October 2014

Prepared 29th October 2014