Small Business, Enterprise and Employment Bill

Written evidence submitted by Simon Clarke (SB 59)

PART 4 - THE PUBS CODE ADJUDICATOR AND THE PUBS CODE

1. INTRODUCTION

2. The committee witnesses were aware that the session would be an hour long and might touch on any one of a number of subjects and sought to prepare accordingly. I appreciate that here were perhaps many issues that were not discussed or could have been discussed at more length but time constraints inhibited detailed consideration of everything. With the latter in mind, I thought it might be useful to supply the committee with an updated version of my notes which address issues that were discussed and issues that were not.

3. SUMMARY

4. Fair Pint Campaign w elcome introduction of statutory regulation. We remain gravely concerned that the proposal as drafted will not deliver the Government commitments of "fairness" and circumstances where "a tied tenant is no worse off than if they were free of tie".

5. Whilst containing provisions for a Parallel Rent Assessment (PRA) the Bill l ack s the all important Market Rent Only option ( MRO ), the PRA and MRO are co dependent on each other just as the Bill and Code are.

6. T he PRA, on its own, may be a useful tool to those coming into the pub sector as it truly demonstrates the detrimental effect of over inflated tied prices on pubs profitability unless the tied rent is significantly reduced to countervail the loss to the tenant. PRA is, however, of little comfort to the 20,000 or so existing tenants. The process leaves the pub owning businesses in the dominant negotiating position allowing them to drain a tenants resources and effectively out litigate them before a tied rent determination is reached. The absence of MRO also leaves a huge loop hole available to pub owning businesses where they can manipulate tied product prices and choice causing the tenants ultimate financial failure within a matter of weeks. Rent review negotiations and procedure can typically take over a year to conclude so without MRO a tenant is left at the mercy of the pub owning company.

7. MRO

8. The Government have accepted that, as the tied model is currently operated, some pub owning businesses are using the provisions of tenancies and leases, unique to tied agreements and absent from other 'normal' commercial agreements, to extract more than a fair share of a pubs profits to the detriment of their tied tenants. Furthermore it is well recognised and acknowledged by Government that there needs to be a transfer of value, a rebalancing of the share of profits taken by those pub owning businesses to their tied tenants, if the Governments commitments are to be delivered.

9. Put simply, the Market Rent Only (MRO) 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, like any other normal commercial agreement, if they consider the tied rent is not fairly reflecting the tied product prices.

10. Essentially MRO puts rent and product price regulation in the hands of the open market not the Government.

11. Like any business model, the tied model needs to survive on its merits, operated fairly, instead of relying upon the subsidies of tenants income, government benefits, pensions, nest eggs and war chests.

12. SELF REGULATION

13. We are at this point in the regulatory process today because Select Committees and indeed now Government have concluded Self Regulation did not work.

14. Self regulation was a pubco inspired idea tabled by their mouthpiece the BBPA to primarily avoid any statutory regulation but at worst buy time to circumvent what might be coming. To the latter extent it has been highly successful. T he so called "Industry Framework Code" is NOT industry agreed. Self regulation did not work because it did not deal with the primary issue - the issue of pubcos taking more than a fair share of the pubs profitability. With the exception of the BBPA the other three organisations have all stated openly their reservations , and the drawbacks , of self regulation.

15. By its own admission the self regulator regime has conceded it can not deal with legal issue s and is not designed to address the problem of the split a pubs profitability between the pub owning business and the tied tenant .

16. Self regulation requires compliance with RICS guidance for rent assessments but that guidance has some significant flaws in interpretation which have been the cause of fundamental dispute between landlord and tenant representatives . The dispute revolves around the issue of a tied tenant being no worse off than if they were free of tie. The pubcos claim the RICS guidance does not provide for such a principle whereas the tenants consider provision has been made to deliver this outcome. There is no way the self regulatory regime can begin to deliberate over such an issue . The self reg' panels amount to a group of, in the main, well meaning amateurs - the only surveyor is Roger Vickers, a panel chairman, who was acting for Punch on his appointment to the position against Dave Mountford and despite requests can not confirm whether he accepts or not the principle that the tied tenant should be no worse off than if free of tie, which is our interpretation of RICS rent guidance intent.

17. A ndrew G riffiths mentioned in witness session with Dave Mountford a trade press survey earlier in the year indicating greater tenant satisfaction . It has to be asked, if such surveys are to be believed then why are the pubcos not offering MRO voluntarily ? W hat Mr Griffiths did not acknowledge was that the same survey outlined an increased awareness of codes amongst tenants but with it came increased perception of failu re in pubcos code compliance. 66% of tenants said their pubco complied with code - to put some numbers to that this seems to indicate that 670 survey participants did not believe code compliance was being adhered to . E xtrapolated this could mean around 6 , 700 tenants may believe their pubco do not comply with code . The question we must ask is, with such a belief of none compliance with the code why are there not more complaint s ? It could be tenants are fearful of raising their heads above the parapet ? (6 tenants who raised code complaint have now lost their pubs) or, as I believe, most believe there is no point. The r emedy does not outweigh the hassle - self regulatory code content is simply not material or meaningful enough . It neither deals with legal issues or appropriate pub profit share.

18. INVESTMENT

19. We are being told by the pub owning businesses a MRO option w ould lead to a drop in pubco investment in pubs . The external and structural repair liability under most pubco leases falls upon the tenant, not the pub owning business, this is different in standard brewery tenancies where the brewery, not the tenant, is liable.

20. I have never seen a breakdown of the pubco claimed investment in pubs but as a tied publican I can safely say I am not aware of any of this investment coming to me.

21. Who actually invests ? Many t enants are massively overcharged with a combination of inflated product prices and rent. A small proportion of this may then be redistributed to some of the tenants struggling to survive under the tied model the rest of this profitable revenue is used for other purposes, e.g. to service bad debt or for executive pay remunerations. S o it ' s actually the over charged tenants not the pubcos that are paying for any reinvestment.

22. Pub owning business investment in improvements is generally rentalised so actually this investment represents a loan , only, unlike a bank loan, it can never be paid off. A tenant continues to pay for the loan over the period of their occupation.

23. At the moment pubcos have multiple revenue streams if MRO were implemented, rent w ould be the only one. As pub rental s are valued on profitability, unlike commercial shop restaurant or bars which are valued on an over area basis. As a result it would absolutely be in the pubco's interest to ensure they work with the tenant in a genuine partnership to encourage improved profitability that would in turn increase their rental income prospects .

24. If tenants chose MRO they would at least perceive that they would have a better chance of improving profitability. Using ETI figures I estimate the average tenant could see an improvement in net profitability of around 7.5% that translates to £20 ,000 per pub . The current, questionable, pubco claimed level of investment is only about £10,000 average per pub.

25. OFT

26. This intervention is not a s a result of a n issue of competition - it i s proposed on the basis of a necessity to deliver fairness in the relationship between landlord and tenant .

27. In the past the OFT have considered the artificial market presented by the existence of the beer tie is not anti competitive yet they now state that allowing tenants the option to choose between a tied agreement and an open market agreement presents competition issues . How do they reconcile that contradiction ?

28. The OFT appear to have failed to consider changes in legislation - the OFT response to the CAMRA s uper complaint was 2010 , since then the then legislation has changed requiring that Land Agreements (of which the supply tie would be one) need to be competitive and now fall under the Competition Act 1998. Anti competitive land agreements, or provisions within them, like ties on pubs, are now prohibited restrictions.

29. The OFT did not believe there would be a significant rental adjustment to rectify the perceived imbalance rendering the tied tenant no worse off than if they were free of tie. They then raised concern that the implementation of the "no worse off" principle may lead to significant rental adjustments. These two statements are contradictory and show a conflicting understanding of the 'no worse off' principle.

30. The OFT showed a l ack of understanding of L andlord and Tenant A ct legislation . A pub c an no t simply be close d by a pubco without first gaining vacant possession and a lessee generally has protection granted from eviction by legislation. The collapse, and subsequent sale, of Admiral Taverns should show us this, the tenants are still trading, the pubs still open.

31. LONDON ECONOMICS

32. I draw the committees attention to the Save the Pub Group report - Feb 2014

33. London Economics measured pubco viability not pubs - if the pubco goes bust the tenant is relatively unaffected. Admiral Taverns should have taught us that.

34. A c oncluding statement of the London Economics report - "It is our conclusion that the reforms proposed in the consultation will close up to 1,600 pubs, although there is very great uncertainty about the precise value;...." what I believe they meant was pubs sold not necessarily closed. Other statements included "In particular, the size of the transfer from pubcos to tenants resulting from the ‘no worse off’ principle is very hard to estimate,..."and "Unravelling these streams, including 'special commercial or financial advantages' (SCORFA) which, by common (dis)agreement are extremely difficult to quantify,....".

35. Like the OFT, London Economics show a lack of understanding of L andlord and Tenants Act legislation . A pubco can not simply evict a tenant because they earn less money from the pub. they may seek to sell it but they can not easily close it.

36. The report was b ased on confidential data supplied by pubcos - who are actively lobbying to try and prevent the Gov ernment taking appropriate action - and information provided by the pubcos mouthpiece the BBPA . There is no verifiably independent research at all and consultation was only held with anti reformist organisations.

37. We believe London Economics were basically paid £40 ,000 for representing the BBPA's data .

38. Compare this to genuine independent research undertaken by the FSB

39. SIBA - Society of Independent Brewers

40. There are 1 , 400 micro pubs . SIBA represent 400 therefore about 2/3 of the micros are not represented by SIBA.

41. It was SIBA that came up with a prototype of the MRO option in the industry mediation in 2009 . they called it 'Easy-pub' - a straight forward open market c ommercial agreement with no product or service ties. The pubco c ould offer tied terms in exchange for a lower rent , or the tenant request a lower rent in exchange for tied terms.

42. In 2010 - following failure of mediation - SIBA joined up with 8 other organisations and formed the Independent Pub Confederation ( IPC ). The IPC manifesto included a MRO option which they signed up to.

43. Not un til Public Consultation submissions were we made available was anyone aware that SIBA had U turned and no longer supported MRO.

44. I deal with dozens of SIBA members, I have yet to find one that wa s aware th at SIBA had put in a submission or that they had U turned on MRO .

45. Some of the top SIBA exec utive are benefiting f rom direct delivery scheme ( DDS ) scheme negotiated with some pubcos so I can see why they may now be enjoying the protection the tied model affords at a personal level.

46. It s eems SIBA exec utive and SIBA membership are not aligned . I suggest the committee members talk to micro brewers in their own constituencies to gauge the level of support for MRO option.

47. Tenancy At Will (TAW)

48. The ' Kill Zone '. A mechanism of short term agreements to trade a pub with a new tenant, avoiding the necessity for pre entry training and awareness. This system 'hooks' new, potentially naive tenants to a tied future. The t enant commits funds, puts kids in school, move s in , decorate s advertises and start s working, committing themselves to the pub before taking any advice.

49. TAW's should be covered by the statutory code if they are to include tied terms. There is an e asy way to overcome statutory regulation on TAW 's - make them FOT , this does not preclude the pub owning company offering to supply products on open market terms . This gives the tenant an opportunity to trade under open market circumstances, and , since reforms are often claimed to be about ' increasing awareness ' , what better way than experience - enabling t enants t o compare the proposed tied deal with open market circumstances and profitability . By making TAW's open market trading opportunities the incentiv e is on the pub owning business to undertake to complete the secure contract terms quicker and make sure their tied deal is seen as competitive . Experience has to be better than the current pre entry training and awareness course that takes about 2 hour s on line, costing £20 and contains no 'health' warnings relating to the tenants likely chances of business survival or likely earnings.

50. BREWERS

51. The Fair Pint Campaigners position is that the Bill requires that the Pubs Code contains a MRO option. The statutory code should apply to all companies with more than 500 pubs, NOT tied pubs but pubs(which exempts the family brewers). Clearly we would not want a brewer to expand to 5,000 pubs, only 499 tied, and not be bound by any statutory regulation. This is about a market share and we are satisfied that those with less than 500 pubs will behave appropriately towards their tied tenants. An advantage of the legislation is that it is capable of amendment on review so if brewers do act poorly the threshold can be alerted to encompass them in statutory regulation in the future.

52. Having said that we do believe the complaints about the associated costs of compliance with a core statutory code are little more than red herrings. After 4 years of self regulation the brewers must have someone undertaking a compliance officers role, compliance reporting is only necessary if the brewer breaches the code and if surveyors are not used now to establish rental values then it begs the question how are they assessed ?

53. The brewers real issue is that MRO on the big six pub owning businesses undermines their protected market brand dominance on the bars of almost 20,000 pubs in this country, as confirmed in a letter from James Staughton to George Osborne in October last year.

54. CRIMINALITY

55. We have long since believed that the way the tied model is operated by some companies is a scandal waiting to happen, possibly with legal repercussions. To many tenants it is little more than a "boiler room" scam, selling worthless investments to unsophisticated and naive people who are sucked dry of their savings.

56. There are misrepresentation cases progressing right now and allegations recently made implying a duty scam and/or misrepresentation to tenants on barrelage volume quotes , under selling, leading to business plans based on false information .

57. Assuming the self regulatory code is legally binding, every code complaint that has been found to be a breach we believe amounts effectively to a breach of contract.

58. We have heard of cases of alleged t hreatening behaviour and intimidation .

59. S ome tied agreements , run by the bigger comp anies, may now be in breach of the Competition Act 19 98, since the Land Exclusion Revocation Order came into effect in Apr il 2011 .

60. Flow monitoring may be considered to be fraud under section 17 Weights and Measures Act 1985 - (3) If any fraud is committed in the using of any weighing or measuring equipment for trade, the person committing the fraud and any other person party to it shall be guilty of an offence and the equipment shall be liable to be forfeited.

61. We believe when one or more of these allegations sticks the entire scandal will begin to unravel and the m erry go round will stop . It is at this point many MP's will appreciate that they may have been misled and duped by a sophisticated organisation, acting much the same as a Cartel, into supporting an unfair and in some cases abusive model to the detriment of the countries heritage whilst those who had the foresight to remove themselves from the limelight (the previous company executives) will no doubt escape without reprimand .

62. The g ame i s up . We l ike n this to a bunch of thieves in a bank vault, they hear the sirens , it ' s about getting out at the last minute with as much as they can carry. For the pubco's it is no longer about avoiding reform it ' s about buying more time , on top of the 10 years bought so far with inquiries, to squeeze out as much as possible.

63. NOTES

EVIDENCE

64. FSB

65. PROBLEM is revealed - in their survey 79% of tied licensees felt their pub company was taking too much of their pub’s profits

66. MISLEADING around one in four tied licensees signed their contracts in the mistaken belief that tied beer prices were the same or lower than open market prices

67. POSITIVES When questioned about how they’d run their pub if a given this option, 75% of tenants said they would take on more staff or increase staff hours, 78.04% would invest in pub maintenance and 73% would invest in modernisation. Almost all tenants (98%) agreed they would have more confidence in the future of their business if they were free of the tie.

68. SELECT COMMITTEE 2008

69. Similar to CAMRA study found 67% earning less than £15,000.

70. CAMRA

71. Licensees tied to the large pub companies were asked how much they personally earn from their pub and 57% reported earning less than £10,000 per annum (80% earn less than £15,000) If that were a franchise it would most likely be kicked off the BFA as it would not be considered sustainable business.

72. BBPA
BBPA figures show 10 years we have lost around 10,000 pubs and in the same period the number of tenanted and leased pubs has declined by over 8,000, in the same period the ownership numbers of Free/Independent pubs has increased by 1,600.

73. CHURN or tenants business failure. No clear evidence has ever been disclosed by the pub companies but E nterprise Inns annual report suggest about a third of their tenants might have churned in 2013. We heard earlier , from David Mountford that Shepherd Neame have possibly churn ed a 1/3 of their tenants since 2013 . The f ormer BII chief exec utive , Neil Robertson, said one brewer he knew churned 64% in 18 months (43% a year) we were later informed this brewer was Marstons. If we extrapolate 1/3 as an industry churn rate about 7,000 tenants a year could be suffering business failure .

74. PUBLIC CONSULTATION

75. 96% agreed Govt should regulate (6,729)

76. 67.6% agreed MRO option best way to ensure tied tenant is no worse off than if they were free of tie (4,718)

77. ONLY 29.9% backed Govt proposal for a parallel rent assessment

78. 47.4% in favour of 500 pubs or more threshold , 52.6% in favour of all pub companies

79. Of the written responses 100% of political representatives in favour of MRO (98)

80. PMA

81. March - No questions about product range or pricing ?

82. The results imply 44% of tenants believed their pubcos were not complying with the codes

83. Extrapolated = 6,700 tied tenants - why only 9 complaints to self regulation authority ?

84. Also if satisfaction is up to 72% then one wonders why they don't simply avoid all this uncertainty and offer a MRO option voluntarily - then there is no necessity for us to try and joust with survey findings.

October 2014

Prepared 31st October 2014