28 Jan 2015 : Column GC141

(b) in connection with a rent assessment or assessment of money payable by the tenant in lieu of rent;

(c) in connection with a significant increase in the price at which any product or service which is subject to a product or service tie is supplied to the tied pub tenant where the increase was not reasonably foreseeable—

(i) when the tenancy or licence was granted, or

(ii) if there has been an assessment of a kind mentioned in paragraph (b), when the last assessment was concluded;

(d) after a trigger event has occurred.

(7) The Pubs Code may specify what “renewal” means in relation to a tenancy or a licence for the purposes of subsection (6).

(8) In subsection (6) “pub arrangements”, in relation to a tied pub, means—

(a) the tenancy or licence under which the tied pub is occupied, and

(b) any other contractual agreement which contains an obligation by virtue of which condition D in section 65 is met in relation to the premises.

(9) In this Part a “trigger event”, in relation to a tied pub tenant, means an event which—

(a) is beyond the control of the tied pub tenant,

(b) was not reasonably foreseeable as mentioned in subsection (6)(c),

(c) has a significant impact on the level of trade that could reasonably be expected to be achieved at the tied pub, and

(d) is of a description specified in the Pubs Code.

(10) In this Part “market rent”, in relation to particular premises at any time, means the rent which the premises might reasonably be expected to fetch at that time in the open market, on the assumption that condition B in section 65 continues to be met.”

Amendments 89AA to 89AF (to Amendment 89A) not moved.

Amendment 89A agreed.

Debate on whether Clause 42 should stand part of the Bill.

Lord Snape: I will be extremely brief, as the Minister has dealt with most of the points that arose from the amendments. There is a nagging feeling that what we are going to approve now is not what the House of Commons actually wanted. The fact is that—surprisingly, at this stage of a Parliament—the Commons defeated the Government on a fairly basic principle with regard to this Bill.

At Second Reading, the Minister accepted on the part of the Government the will of the Commons and said, basically, that the Government would adopt the principles that the Commons had advocated with regard to pub codes and publicans. With respect, that is not what we are getting today; what we thought was there in the Bill has now become a consultative period and what will amount to secondary legislation. I put it to the Minister, and to the Committee at large, that at this stage of this Parliament what we are doing is not what the Commons wanted us to. I can see that questions will be asked at that end of the building about our procedures here.

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We have only a short time before the general election on 7 May, after which there will be a new Government, of whatever political hue or hues. That will mean there is a considerable amount of time before consideration takes place and the Minister’s undertakings to the Committee today are brought into force. I put it to the Minister that before Report we should look again at the two Clause 42s, the old one and the new, and see if there are parts of the old one that really ought to be incorporated into the new one, if only to ease the feeling outside this place that whatever happens over the next year or 14 months will water down the agreements that we thought had been reached as a result of the Commons decision. It is unusual, to say the least, that a Government should be defeated on something like this.

I address my closing remarks to the noble Lord, Lord Hodgson, in particular: he should not think that the decision was arrived at because of pressure from CAMRA or any other body. I think that many Conservative Members of the other place looked at what was happening to their own local in their own town or village and decided that that was why they felt Greg Mulholland’s amendment ought to be accepted. I hope I can get some assurances from the Minister that there will be some discussions with other people before Report so that we can see some of the watering down that we perceive in the difference between the two Clause 42s being rectified.

Lord Hodgson of Astley Abbotts: Once again, the trade is under pressure and the noble Lord assumes that it is all due to the tie. I wish it were that simple. The fact is that there are real difficulties for our pubs, for the reasons that I have explained. Trying to put more pressure on one particular part of the industry will not help it, I fear.

Lord Snape: Again, I accept that, but the noble Lord must accept that when Back-Benchers rebel in the way that Back-Benchers rebelled in the other place on a piece of legislation such as this, those rebels share a great many concerns. I put it no higher than that. I asked the Minister for an undertaking that she will look again at the differences between the two clauses and see whether we can toughen up new Clause 42 in the way that I believe the House of Commons intended in the first place.

7 pm

Baroness Neville-Rolfe: I am grateful to the noble Lord, Lord Snape, for raising that point. First, I emphasise that we have accepted MRO; I do not renege on anything that I said at Second Reading. The detail of legislation has to be right. Let us by all means meet; let us meet soon; let us look at new Clause 42 alongside the old Clause 42 and engage on the differences and why we have done things, in good faith, in the way that we have. I would be very happy to agree to that process and I am grateful for the discussion that has taken place today. We are trying to do the right thing here.

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Lord Snape: I thank the Minister for that undertaking, and for the way that she has conducted the Committee so far. I did not even object to the noble Lord, Lord Hodgson, being present in the same room; we might teach him something about the pub trade that he does not know, although that is difficult to imagine.

Clause 42 agreed.

28 Jan 2015 : Column GC144

(2) The regulations may, in particular, make provision concerning the resolution of disputes about whether—

(a) circumstances are such that a pub-owning business is required to offer a tied pub tenant a market rent option;

(b) a proposed tenancy or licence is MRO-compliant;

(c) a determination of the market rent of a tenancy or licence made by an independent assessor has been made in accordance with the Pubs Code;

(d) any other requirement of the market rent option procedure has been complied with.

(3) The regulations may, in particular, confer on the Adjudicator the function of determining the market rent of a tenancy or licence in such circumstances as may be specified in the regulations.

(4) Nothing in sections 45 to 49 applies in relation to provision made by virtue of section (Pubs Code: market rent option) or (Market rent option: procedure) but the regulations may include provision which is similar to that contained in or made under those sections.”

Amendments 89B and 89C agreed.

Clause 43: Review of the Pubs Code

Lord Hodgson of Astley Abbotts: My Lords, after three and a quarter hours on the first set of amendments, I shall be exceptionally brief. I propose Amendment 90 and will speak to Amendments 92 and 96A. They are all concerned with the process by which any future changes to the Pubs Code will be brought about. At this stage they are probing amendments.

As we have found in our discussion over the past few hours, the operation of the Pubs Code is not without its controversial aspects, and this is a chance for the Minister to explain to the Committee how she sees those changes being reported on. Amendment 90 is concerned with the operation of Clause 43, concerning any review of the Pubs Code. It would insert the words:

“Any proposed changes to the Pubs Code must be subject to full parliamentary scrutiny and consultation”.

It is a pretty declaratory amendment, and I should be grateful to hear from the Minister a bit more about the detail of how she thinks that it will operate.

Amendment 92 concerns Clause 66, which defines a pub-owning business as being a landlord of 500 or more tied pubs. Can that figure be changed? When we get to Amendment 91D, I think that my noble friend Lord Howard of Rising will have something more trenchant to say on the subject than I have, but I think that it is important to learn how the Minister thinks that that figure could be changed, if it was to be.

Finally, Amendment 96A substitutes an affirmative order for a negative resolution procedure for the permission for the abolition of the Pubs Code under Clause 63(1)(c). As I said, at this stage, they are all probing amendments, but it would be helpful to the Committee if my noble friend could explain how she thinks that the changes to the code and ancillary aspects might take place in future. I beg to move.

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Baroness Neville-Rolfe: My Lords, I hope that I can reassure my noble friend that the Pubs Code will be the subject of further formal consultation following Royal Assent. Furthermore, it will be a statutory instrument made under the affirmative procedure, and any future changes to the code will also be subject to that procedure. On Amendment 92, I reassure my noble friend that any change to the threshold for pub companies to be covered by the code must also be made by affirmative resolution, and must follow a review and full consultation.

On Amendment 96A, Clause 63 provides that the adjudicator can be abolished if, following a review, the Secretary of State is satisfied that the role of the adjudicator is no longer deemed necessary. It is only in the event of the Pubs Code having already been revoked and not replaced by the affirmative resolution procedure, as I have said, that the adjudicator would be abolished by the negative procedure. In those circumstances, the removal of the adjudicator is of course consequential on the abolition of the code, which would have been debated in both Houses. The adjudicator’s role is to enforce the Pubs Code; if Parliament has debated and agreed the decision to revoke the code, it seems entirely reasonable to abolish the adjudicator by negative procedure. I hope that this reassures my noble friend that he can withdraw his amendment.

Lord Hodgson of Astley Abbotts: I thank the Minister. I accept her explanation of all three amendments, and I beg leave to withdraw the amendment.

Amendment 90 withdrawn.

Amendment 90ZA agreed.

Clause 43, as amended, agreed.

Lord Berkeley: My Lords, this amendment concerns how the adjudicator takes into account the various financial factors relating to a pub when considering what its market rent should be. We have a lot of pubs where I live in Cornwall, some of them very lovely ones on the waterfront. I do not know how much money they make but there is a feeling that if they were sold for desirable waterside residences, of which there are already an enormous number, they could probably fetch a much larger amount of money than they earn for the owners at the moment as pubs.

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That may or may not matter, but there is an issue here of what the role of the pub is in a small community. It acts as a kind of community centre. It may be where people congregate at different times of the day. It keeps village life going. It would be a great shame if the value of a pub on the open market, for retail or as a house, made it in the interests of the landlords to sell it and try to change its use.

There was another example in the Guardian last Saturday, in a nice article on pubs generally, given by someone who works for a company called Paramount Investments:

“In north London if I am selling a pub as a development opportunity I might be able to ask £700,000-£1m for something that as a pub I would only be able to get £350,000-£450,000 for”.

It gives other examples in Marylebone and other places where property values are very high, as they are in London. The problem is wider than London and Cornwall; it could be in many places where the property value is high. In this amendment, which obviously is a probing amendment so the wording might not be quite right, I am trying to propose that in assessing the rent no allowance should be made for a change in value due to a change of use that could be achieved if the pub were no longer a pub. I beg to move.

Baroness Neville-Rolfe: My Lords, I am grateful to the noble Lord for his amendment and I am looking forward to visiting some of his local pubs in Cornwall before long. To be brief, subsection (10) of the proposed new clause in government Amendment 89A makes it clear that a market rent is,

“the rent which the premises might reasonably be expected to fetch at that time in the open market”,

on the assumption that the sale of alcohol for consumption on the premises remains the main activity or one of the main activities of the premises. It is clear that the market rent is for the premises as a pub. I hope this reassures the noble Lord.

Lord Berkeley: I am very grateful to the Minister. The amendment came through after I went through all this. I am very grateful for her explanation and beg leave to withdraw the amendment.

Amendment 90A withdrawn.

Clause 44: Inconsistency with Pubs Code etc

Amendments 90AA and 90AB agreed.

Clause 44, as amended, agreed.

Clauses 45 to 58 agreed.

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Clause 59: Annual report

Amendment 90AC agreed.

Clause 59, as amended, agreed.

Clause 60: Levy funding

Lord Hodgson of Astley Abbotts: My Lords, I will speak also to Amendment 90C. We come to Clause 60 about levy funding. This brings us to the age-old question of who is going to pay for the regulatory structure now being set up.

Clause 60(1) says:

“The Adjudicator may require pub-owning businesses to pay in each financial year a levy towards the Adjudicator’s expenses”.

Pub-owning businesses are, of course, defined elsewhere in the Bill as having 500 or more tied pubs. I think the word “may” is a euphemism. “Will” require is undoubtedly the right way to put it—who else is going to pay?

I recognise that any pubco with fewer than 500 tenants falls outside the code, although I share the questions of the noble Lord, Lord Berkeley, over the logic of why a tenant of a pubco owning 500 tied pubs should be treated any differently from a tenant of a pubco owning 450 tied pubs. The noble Lord, Lord Berkeley, made a very fair point as far as that was concerned. But I can reassure him because the answer is that in quite a short period of time it will not be outside the code. It is inevitable that the MRO option and the Pubs Code generally will roll out over the whole pub sector. It may be unofficial but no small pubco or brewery will be able to resist the demands of one of its tenants who thinks that his rival on the high street who is owned by a large pubco has gained some competitive advantage. The small pubco or small brewer may resist for a bit, but in fairly short order they will have to concede or risk having some seriously disaffected tied tenants, on the basis that the tenants will say that if the brewer has nothing to hide, they have nothing to fear.

The code will become the standard for the industry, not just in the way the MRO option has to be offered but in a range of other factors that make up the tied relationship under the code. My argument is that those who use the code and are able to take advantage of it ought to pay for the system it establishes. So Amendment 90B leaves out “may require” and inserts the words “must require every”, and Amendment 90C

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changes the definition of those required to pay the levy to include all companies or breweries that operate tied pubs.

The levy, which will presumably be levied on a per-pub basis, would not cost the smaller companies much. The bulk of the costs of the new regulatory regime will be borne, quite rightly, by the larger tied estates. However, there is an important point of principle that those who benefit from a regulatory regime should contribute, however modestly, to its cost. I beg to move.

7.15 pm

Lord Newby (LD): My Lords, these amendments relate to Clause 60, which will enable the adjudicator to levy funds on pub-owning businesses to contribute to the adjudicator’s expenses, with the Secretary of State’s consent. Amendment 90B would change “may” to “must”, making the power a duty. We have had many similar debates on a number of subjects during my time in your Lordships’ House. I remember with affection the noble Lord, Lord Barnett, trying to get us to put “must” into various banking Bills, with no success. As I said then, and as I am sure the noble Lord, Lord Hodgson, realises, “may” in reality often means “must”. I assure him that in this case the amendment is not necessary.

The amendments would together require the adjudicator to impose a levy not only on the pub-owning companies in scope of the code but on any pub-owning company with tied pubs. I hear what the noble Lord says about the code becoming the industry standard for everybody, but that is by no means clear at this point. It is certainly not a requirement of the Bill. To the extent that pubcos not covered by the Bill did not use the code, this amendment would go against the “polluter pays” principle. The Government are clear that funding the adjudicator through a levy on pub-owning businesses covered by the Pubs Code is the right approach. The conduct of the large pub-owning businesses has led to the need for the adjudicator, so it is appropriate that they should cover the costs. This approach is in keeping with the funding of the Groceries Code Adjudicator by the large retailers in scope of the Groceries Code.

It would be unfair for companies such as the family brewers, whose tied tenants would not have the protections of the Pubs Code—at least initially—nor the ability to refer disputes to the adjudicator, to contribute to the levy. The representative body for some of these smaller companies, the Independent Family Brewers of Britain, has committed to continuing the current voluntary arrangements. This includes funding industry dispute resolution services to continue to provide protections for their tied tenants, so the amendment would require them to pay twice. The Government intend to fund the set-up costs of the adjudicator—but, once it has been established, it is only right that the expenses are met by that part of the industry whose conduct has led to the need for the adjudicator. The existing drafting of Clause 60 provides for this.

The amendments would also require the adjudicator to impose a levy every financial year. This would be the case even if, however unlikely, the money was not

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required that year—a situation which could arise if there was sufficient money left unspent from the previous year. It is therefore right to allow this flexibility for such circumstances. I hope that I have been able to persuade my noble friend that he should not press his amendment.

Lord Hodgson of Astley Abbotts: My Lords, my noble friend has brought us back to the extraordinary aspect of the parliamentary draftsmen, where “may” equals “must”. Who else in this country would believe that “may” equals “must”? He is quite right to remind us that this is one of the quirks of parliamentary draftsmanship. If, as he points out, the polluter should pay—and if the code becomes widely used by smaller companies below the 500 limit—all I would like to know is whether there is a possibility that, at that stage, the cost of the code could be extended to cover the people using the code, because that is the “polluter pays” principle that he referred to. I hope that the Government will think about that, but, in the mean time, and particularly given the hour, I beg leave to withdraw the amendment.

Amendment 90B withdrawn.

Amendment 90C not moved.

Clause 60 agreed.

Clauses 61 to 64 agreed.

Clause 65: “Tied pub”

Amendment 91 not moved.

Amendment 91ZA agreed.

Clause 65, as amended, agreed.

Clause 66: “Pub-owning business”

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(a) in the period beginning with the day on which the Pubs Code comes into force and ending with the following 31 March, if immediately before the Pubs Code comes into force the person was the landlord of 500 or more tied pubs;

(b) in any subsequent financial year, if for a period of at least 6 months in the previous financial year the person was the landlord of 500 or more tied pubs.

(1A) For the purposes of calculating the number of tied pubs of which a person (“L”) is the landlord, any tied pub the landlord of which is a person who is a group undertaking in relation to L is treated as a tied pub of which L is the landlord.”

Baroness Neville-Rolfe: My Lords, the tied model has long been part of our history. As my noble friend Lord Hodgson said, properly operated it can be beneficial to both pub company and tied tenant. However, as the Government made clear in their consultation response, the evidence has accumulated of problems of abuses of the tied relationship. In an online survey carried out in parallel with the Government’s consultation, 91% of more than 700 tenants identified the beer tie as the biggest challenge that they face. In the government amendments that I am moving we are focusing the market rent only option on the tied model, consistent with rest of this part of the Bill. All of this part will then apply to pub-owning companies which own 500 or more tied pubs.

In contrast, the MRO option inserted into the Bill in the other place would apply to companies with 500 pubs of any kind and one tenanted or leased pub. This would include free-of-tie pubs. As I have already said, the Government do not agree with that approach. There is some evidence of problems in the free-of-tie sector. Some free-of-tie tenants, for example, feel that their property insurance is too high. That is a common issue with commercial leases right across sectors. In the pub sector, by contrast, we have a large body of evidence of problems with tied pub agreements. The Government therefore wish to focus regulation where there is evidence of significant problems, not on the free-of-tie sector. I hope that the Committee will be content to support these amendments. I propose again to listen to noble Lords before responding to the other amendments in this group.

The Deputy Chairman of Committees (Baroness Stedman-Scott) (Con): My Lords, I advise the Committee that if this amendment is agreed to it pre-empts Amendments 91A and 91AZA.

Lord Howard of Rising (Con): My Lords, I wish to speak to Amendment 91D in this group. Its purpose is to remove uncertainty and so give smaller breweries a stable background in which to run their businesses. Helping small business is after all the purpose of the Bill. For these smaller breweries—indeed, for any pub company—to be successful in a declining market, it is essential that they make significant investment in their pubs. This necessary investment is not practical if they do not know under what rules they are operating. My noble friend mentioned changing the figure of 500 by affirmative resolution, but while change by regulation or order goes some way towards parliamentary examination it is, for practical purposes, a rubber

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stamp. Between 1950 and 2014, only 11 resolutions were rejected in the other place and only five in your Lordships’ House.

For that reason, if the Secretary of State can change the 500-pub definition to a different number by regulation, that will create uncertainty and severely restrict, if not halt, the investment necessary for the survival of the smaller breweries—which, by the way, generally speaking, have been increasers rather than closers of pubs. If noble Lords think that it is overpessimistic to say that investment will dry up, I remind them that under the last change in the rules governing the ownership of pubs many famous names, as my noble friend Lord Hodgson alluded to earlier, such as Whitbread, Bass, Scottish & Newcastle, Courage and Watneys have been absorbed by multinationals. It would be against the spirit of what we are trying to achieve today if a consequence was to contribute to the demise of small breweries.

Any change to the number of 500 should be subject to primary legislation. I urge the Minister to consider the amendment seriously so that those smaller breweries can continue to invest and create the prosperity necessary to maintain that part of the pub sector and help stem the decline of pubs.

Lord Whitty: My Lords, I have three amendments in this group which go in exactly the opposite direction of the noble Baroness’s amendments.

We could keep the question of definition to talks between now and Report. I do not want to go over the arguments that we had earlier, but to define the owners, the pubcos, to which this applies in reference solely to tied pubs runs the danger of those pubcos altering their tenancy arrangements so that they fall below the threshold. I assure the noble Lord, Lord Howard, that this provision is not intended to hit the family and small regional brewers. We know that the large companies have a range of arrangements with their tenancies and are defined by the totality of their portfolio. It is relatively easy, given the turnover of tenants, for the companies to switch from one form of tenancy to another. They would have a motivation to do so, in order to fall below a tenancy threshold related to tied accommodation alone.

This is one of the issues on which we should have further talks. It is possible that we would have a different tied-specific definition, but that would require other obligations being put on the pubcos so that they would not change the designation of their portfolio to get around this threshold. I suppose that it would be difficult to draft such clauses, but there is a real danger of them gaming this situation. We know that some companies are already contemplating breaking their structure up.

We need more talk about what the definition covers. In a sense, this is the wrong way to go about it, but I would hope that the noble Baroness would not press the amendment and would rather make it subject to the talks to which she has committed for the coming period.

Lord Hodgson of Astley Abbotts: The noble Lord, Lord Whitty, and I have taken common cause on various things but he will not be surprised to know

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that I cannot take common cause with him on this tonight. A managed pub, as I explained at some length in my opening remarks, has an employee. It is a totally different relationship. To say that pubcos could switch their estate from being tied to being managed would mean changing the whole basis of the employment. The fact is that they are employees with salaries and bonuses and fringe benefits. It is not possible to undertake the sort of gaming that the noble Lord is describing—in terms of switching from managed to tied—which is why managed pubs can safely be left out. The question of what the tie means is something which we have been discussing tonight, but managed pubs form no part of this because they have employees with all the applicable rights and responsibilities.

Lord Stoneham of Droxford: My Lords, the noble Lord, Lord Hodgson, indicates why this needs more discussion. He is right on managed pubs—I absolutely agree—but leased pubs do switch between leased and tied. That is why I was raising my point. The Bill looks very much at the tied part of the sector, but there is movement here which needs to be looked at. To say that any change in the number—once we have decided what that number is—should require further primary legislation and be subject to affirmative resolution is wrong because, as we have seen over the last couple of decades in this sector, people adjust to new legislation and they also sometimes try to avoid its objectives. The Minister, with suitable consultation through the affirmative procedure, needs to be able to make changes as necessary. The number could well be up or down, but it needs to be made appropriately. The prime issue is leased and tied pubs, not managed ones.

7.30 pm

Lord Berkeley: My Lords, in this group is my motion that Clause 68 stand part of the Bill. This is an interesting clause, because it is called “Power to grant exemptions from Pubs Code”. If this is read one way, one could assume that every pubco will seek exemption by being specified. This is the usual business of what “specified” means. The word is mentioned eight or nine times in this short clause and then, at the end, it says:

“In this section ‘specified’ means specified in regulations”.

We have not seen the regulations, which is, I am afraid, quite normal in this House and has been for many years. What does “specified” mean? There are various exemptions, such as,

“the dealings of a specified pub-owning business …with their tied pub tenants… of a specified description”.

Does it mean that if they sell fish and chips rather than food they are going to be exempt? Does it mean that if they invite too many Members of your Lordships’ House out to lunch they are going to be exempt? Henry VIII would be proud of this clause and I am sure the Minister is equally proud of it. However, before we get much further we ought to have some explanation of what it means. Who would be exempt and under what circumstances? Why should there be any exemptions? I am sure the Minister will be able to give me some good explanations about why it is very important to have this clause in the Bill.

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Lord Mendelsohn: My Lords, I have only a few points to make on these matters as the issues have already been covered quite well. However, I want to stress that these are highly important to our consideration of the Bill and we will look closely at the evolution of the Government’s thinking on them. We stand ready to work with the Government on these amendments and are content to move forward with them in the Bill, on the basis of there being discussion at a later time. However, we would be very concerned if there were no further changes.

We are concerned with how the thresholds are framed. We accept that the Government are focused on the pub-owning companies and we are highly supportive of that. We do not like the formulation that uses the phrase “tied pubs”. We believe there is an overwhelming case to use the terms we proposed—“tenanted” and “leased”—and we would like to see these in the Bill. We have some sympathy with the Government’s predicament on getting these definitions right, but we hope they are willing to show some flexibility on it. There is considerable concern that the situation can be gamed and that the provision of a power to the Secretary of State to vary the number of 500, and to grant exclusions, could be a serious and significant weakening of the Bill or a measure to ensure that anti-avoidance measures can be made more effective.

It is very important that there is a much clearer statement about what the dual-purpose clauses are and that what we put in the Bill is consistent with the work of the other place. It would be very useful if the Minister could give us much greater reassurance on that.

Baroness Neville-Rolfe: My Lords, I am grateful to my noble friends and to noble Lords for their amendments. We are, of course, happy to meet with noble Lords to discuss how these amendments work, the needs of small business and anti-avoidance. We agree with the noble Lord, Lord Mendelsohn, that reform should be about the tie. There is a difference in Committee this evening but a number of concerns have been expressed. These include the lack of draft regulations which, I am afraid, reflects the fact that MRO was a late amendment to this important Bill.

Having said that, perhaps I could talk a bit about the powers and then quickly address the amendments so that the Committee can understand where we are coming from, ahead of any discussions. First, any use of the power would need to be on the basis of strong evidence to justify the exclusion of a type of agreement or type of company. Without this evidence, it would be open to challenge. For example, if it were used to exclude one or two pub companies, it could be seen as a discriminatory use of the power and would lead to a high risk of successful legal challenge. Any attempt to undermine the principle of the legislation—that is, by exempting all pubs—would be an improper use of the power, as it would be subverting the will of Parliament.

Amendments 91AZA, 91BA and 91CA would include the free-of-tie market in the scope of our provisions. As I set out in my opening remarks, the evidence of the past 10 years, from the BIS Select Committee and the government consultation onwards, shows that the

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problems in the pub industry relate to abuses of the tied relationship. We do not have evidence of a problem in the free-of-tie or managed market.

Amendments 91A, 91B and 91C in the name of the noble Lord, Lord Berkeley, seek to lower the threshold to capture pub companies with 100 or more tied pubs. I have probably covered this ground adequately in our earlier discussions, and in the interest of time, if the noble Lord is happy, I will not repeat the points.

I should probably talk about the need for Clause 68; that might be helpful. It is an important clause, as it is the means by which we can ensure that the definition of a “tied pub” does not inadvertently capture a restaurant or hotel premises. We are already aware of a fish and chip restaurant chain that may meet the definition as set out in Clause 65, and it is possible that there could be other such cases. We would be happy to talk through that concern. We all think that we know a pub when we see one and we think we know the difference between a pub and a fish and chip shop, but increasing food consumption in pub, gastropubs and so on has made separation by legal definition more complex. Clause 68 provides a power for the Secretary of State to exempt a particular type of tenant or premises from the Pubs Code by secondary legislation so that only pub premises are in scope.

The noble Lords, Lord Stoneham and Lord Whitty, were concerned about pubcos turning tied pubs into free-of-tie pubs by coming under the threshold. The evidence that we have of abuse is in the tied market. As I said earlier, if pub companies turned pubs into free-of-tie pubs, their ability to exploit their tenants through the tie would be gone.

Lastly—and I am sorry because he spoke first—my noble friend Lord Howard championed small operators, which I was glad to hear, and queried the power of the Secretary of State to amend the threshold by way of secondary legislation. The Government are clear that the threshold we have proposed of 500 or more tied pubs is the right one, because it is designed to ensure that the Pubs Code and the market rent only option are targeted at the part of the market where we have a problem. However, legislation needs to be capable of responding to changes in the market that may come about in the longer term—for example, if new pub ownership models were to emerge that merited exclusion from all or part of the code.

I hope that we can agree the government amendments so that we have a base for further discussion ahead of, and on, Report. In view of the explanations I have given, I hope that noble Lords will not move their amendments.

Amendment 912B agreed.

Amendments 91A and 91AZA not moved.

The Deputy Chairman of Committees: My Lords, I must advise that if Amendment 91AD is agreed then Amendments 91B to 91CA will be pre-empted.

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91AB: Clause 66, page 50, line 2, leave out “such a landlord” and insert “a pub-owning business”

Amendments 91AA to 91AD agreed.

Amendments 91B to 91CA not moved.

Amendment 91D not moved.

Amendments 91E and 91F agreed.

Amendment 92 not moved.

Clause 66, as amended, agreed.

Clause 67: “Tied pub tenant”, “landlord”, “tenancy” and “licence”

Lord Hodgson of Astley Abbotts: My Lords, Amendment 93 could be called, in shorthand terms, the “shopping around clause”. My noble friend the Minister may have spoken to this earlier; I hope that she will be able to reassure me in fairly short order that my amendment is no longer needed with the new provisions.

Clause 67, to which this amendment refers, defines inter alia the term “tied pub tenant”. It does so in respect of prospective tenants at subsection(1)(b), which says,

“who is a party to negotiations relating to the prospective tenancy of or licence to occupy premises which are, or on completion of the negotiations are expected to be, a tied pub”.

That is a very loose definition. An individual might make a casual inquiry—even by telephone—about taking on a tied tenancy but may be without any serious intent, at least initially, of eventually signing up. However, the pubco does not know that when the telephone call is received. As such, under this wide definition in the new regime, it will have to go through considerable administrative procedures at some cost at this early stage.

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My Amendment 93 would narrow the definition to people who are getting close to signing up and making an arrangement by inserting the words,

“who is party to negotiations which have reached the stage of a provisional trading agreement for the prospective tenancy of a premises which are, or expected to be, a tied pub ahead of any final terms of the agreement being agreed”.

This has the effect of requiring serious administrative effort to be made only once the tenant has shown himself to be of serious intent. It in no way weakens his position; it merely ensures that he is likely finally to take on a tenancy before he qualifies as a tied pub tenant, with all that that implies under the code. I beg to move.

Lord Newby: My Lords, I hope that I can reassure my noble friend Lord Hodgson on this point. Evidence from the Government’s consultation in 2013 and correspondence we have received from tenants shows that many such prospective tenants appear to have been given insufficient information, or have even been misinformed, by large pub-owning companies about the pub that they are negotiating to take on. The Pubs Code will ensure that prospective tenants receive the information they need to make a considered decision on whether the deal they are being offered is fair and right for them.

I completely understand the concerns that my noble friend raised. As he said, we clearly need to avoid the situation where any casual enquirer is entitled to all the code’s protections. That would be unnecessary and onerous for the pub companies. At the same time, we need to ensure that prospective tenants receive the information promised by the code early enough in their negotiations with the pub company to influence their decision. That is why we have carefully phrased Clause 67(1)(b) to restrict these rights to those who are,

“a party to negotiations relating to the prospective tenancy”.

If there have been no negotiations, there would be no right to the details. The pub-owning company would not be in breach of the Pubs Code for failing to supply them. We will consult on the code before it is finalised, which will allow us to ensure that we will draw the line in the right place, in a way that takes account of the procedures that different pub companies use to recruit and take on new tied tenants. I hope that that gives my noble friend the reassurance that he seeks.

7.45 pm

Lord Hodgson of Astley Abbotts: I am grateful to my noble friend. His remarks make clear that the Government have hoisted on board the danger of considerable administrative cost and effort for casual inquiries, which is the thrust behind my amendment. I should just like to get reassurance from outside that the “party to negotiations” carries the weight that he implied in his remark. If it does, I am more than content and, for the purposes of this evening, I am happy to withdraw the amendment.

Amendment 93 withdrawn.

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Lord Hodgson of Astley Abbotts: Amendments 94 and 95 once again concern Clause 67, the definition clause—in particular, the definition of a tenancy in Clause 67(2). Amendment 94 would remove line 43, the words,

“includes a tenancy at will”,

from the provisions of the code. A tenancy at will is essentially a short-term informal agreement which imposes no timescale on either side. It would therefore seem illogical to impose the relatively heavy-duty encompassing arrangements of the code in such circumstances, which either side can abrogate at any time. For the same reason, Amendment 95 would exclude from the code short-term temporary agreements by the wording:

“The definition of tenancy … excludes temporary agreement where the tenant has occupied the same pub premises for less than twelve months”.

There are many reasons why individuals take on a pub under temporary agreements. For example, earlier I referred to the hard work and long hours required to run a successful pub. Some people find the experience not entirely to their liking and give up. Others, perhaps more wisely, decide to give the experience a try for a few months to see how it fits with their lifestyle and whether they really enjoy it. They do so under a temporary agreement. It surely cannot be logical to apply the administrative burden of the new regulatory regime in such circumstances.

There are those who argue that that will provide a loophole to evade the new regime—the noble Lord, Lord Snape, will no doubt be on his feet in a second. I accept the existence of that suspicion. The answer must be to draft the code or the primary legislation so that temporary agreements cannot last more than 12 months and that one temporary agreement with the same premises and tenant cannot follow another. That will give people the opportunity to dip their toe into the water and see how they like it, without having to go through a lot of administrative hassle. That is a simpler, better and less costly way to encourage tenants to come forward and see whether they like it without having to take on all the administrative requirements of the code. In that spirit, I beg to move.

Lord Snape: My Lords, I enter the debate with some trepidation after the way that it was introduced. I, too, will be very brief. I am grateful to the noble Lord, Lord Hodgson, for making my speech for me. He underlined the dangers of the amendment. Tenancies at will are where part of the problem lies. I go back to my daughter and son-in-law’s experience. They think that it must be wonderful to have a tenancy on a country pub with ivy round the door, great customers and all the rest of it. Of course, they will be treated very well by the pubcos. They will be looked after; their delivery will come on the proper day; lots of things will be done on their behalf. After a year, once they sign up, they will find out the reality of the situation. It is at that stage that many problems arise,

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despite the blandishments of the noble Lord, Lord Hodgson, so I hope that despite his honeyed words, the Minister will resist the temptation. I say to him: nice try but it will not wash, I am afraid.

Baroness Neville-Rolfe: My Lords, I thank my noble friend Lord Hodgson for his amendment on tenancies at will. I was very glad also to hear from the noble Lord, Lord Snape, given his great experience in the industry.

I agree with my noble friend that tenancy at will agreements are important in enabling pub companies to cover short-term gaps, to keep pubs trading in between tenants. They also allow the company time to complete due diligence on a new longer-term tenant. Temporary agreements can be useful to a prospective tenant as a trial run, prior to committing to a longer-term agreement. I have known ex-senior civil servants who have taken on pubs and found them quite a challenge.

In the other place, my honourable friend Jo Swinson committed to consider calls to exempt genuinely short-term agreements from the Pubs Code. These calls came from pub companies and some tenant groups. I can announce today that the Government will use the power in Clause 68 to exclude from the code tenancies at will and temporary agreements that do not extend beyond a certain limited period. This is to ensure that agreements that are meant to be temporary do not run on for long periods of time as a way of avoiding the code. This does not require an amendment to the Bill but, as part of the consultation on secondary legislation, we will consult on the length of agreements that should be exempted.

We have heard different views from stakeholders as to the length—including 12 months, as proposed by my noble friend—but we have also heard calls for six and nine months. Therefore, we will consult more widely on the length of any exemption period before bringing forward regulations. I hope my noble friend will feel able to withdraw his amendment.

Lord Hodgson of Astley Abbotts: I am very grateful to my noble friend for that commitment. I am not stuck on 12 months. All I think we should be trying to provide is a means for people to test out the possibility of becoming a tenant and, therefore, a reasonable period of time. It could be six or nine months; I am quite content about that. The important thing is we should have a regulatory-light opportunity for people to try it out and then if they decide that they want to make it their career, they get the full protections anticipated under the code. In those circumstances, I am happy to withdraw the amendment.

Amendment 94 withdrawn.

Amendment 95 not moved.

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Lord Hodgson of Astley Abbotts: My Lords, this amendment is concerned with the franchise of pub operations. I have remarked repeatedly during the past few hours that the point of weakness of the tie is where the interests of the two parties—the pub owner and the tenant—diverge.

That tension occurs in two places in particular. The first is the rent being charged for the tied premises. The belief or allegation is that landlords are insufficiently deterred from increasing the rent charged. I would emphasise that pubcos have an interest in avoiding pubs closing, particularly those that have an integrated model because they need the outlet for their beer, but undoubtedly the tension exists and, as I said, I do not doubt that some bad cases have occurred. The second point of tension is in the pricing of the goods that the tied tenant is obliged to sell. Again, the allegation is that the pub owner will push the sale price as high as possible. Again, there are arguments why this is not in the pub owner’s interests. Again, let me recognise that the conflict of interest exists.

Some pubcos, particularly integrated pubcos, have sought to address these twin challenges. They have done so by creating a business model based on revenue-sharing. Under such a model, both parties have an interest in maximising turnover. This business model is exactly like a franchise for McDonald’s, Pizza Express or Costa Coffee. Indeed, the agreements have been accredited by the British Franchise Association.

How does it work? The franchisee receives the property, fixtures and fittings, capital investment, and repair and replacement of the fixtures and fittings of the building. All his bills are paid, including rates and utilities. The only bills not paid are council tax and staff wages. He also has services such as training, marketing and business support—the SCORFA arrangement we talked about earlier—and he has products to sell. For this, the franchisee—the operator of the pub—takes a share of the income at the cost of a business fee of about £5,000, compared to the £250,000 that you have to pay for a McDonald’s franchise, for example.

The cost of the products to the franchisee is irrelevant because they are paid a percentage of the revenue of the pub. The goods are delivered to the site and the franchisee holds them on behalf of the franchisor—the brewer. The products are held on the sale-or-return basis. At no time does any cash change hands in respect of payment for the products. The franchisee and franchisor take an agreed share of the total income. The franchisee has the ability to set the retail sales price for the beer in the pub being operated. The pubco effectively supplies everything, with the franchisee then dictating the price to sell it at. The pubco shares the income and, on top of this, the franchisee also receives a profit share. Under the agreement, the percentages and shares of the profit are set out in the contract and cannot be altered.

It appears that this revenue-sharing franchise-type arrangement will still fall within the provisions of the proposed code, so Amendment 96 seeks to insert a new subsection into Clause 67, which is concerned with the definition of tenancy. It proposes that:

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“The definition of ‘tenancy’ in subsection (2) excludes franchise agreements whereby no rent is paid by the franchisee and their share of the profit is unaffected by the price paid for tied products”.

This approach in the wording ensures a community of interest between the franchisor and the pubco. If the Government do not accept this amendment, or one like it, they will be singling out the pub trade for very discriminatory treatment. If the argument is that the franchisee has to sell a certain type of product, that is true—but if you hold a McDonald’s franchise, you have to stock Pepsi and are forbidden to sell Coke. Members of the Committee might liken it to walking into a Costa Coffee and asking, “Please can I have a Starbucks?”.

This revenue-sharing arrangement ends the possibility of divergence of interest between pub owner and tenant. It provides a useful model for future pub developments and I trust that the Government will either be able to reassure me tonight that it is not intended to include these or make the necessary changes on Report. I beg to move.

Lord Berkeley: I really cannot imagine how anyone would want to take a franchise like this. It is a variation on the old zero-hours contract, which we talk about. It could be a franchise with zero income and the hours being 24/7. Why should anybody want this contract? I will be interested to hear what the Minister says, but the pubcos must love it.

Baroness Neville-Rolfe: My Lords, I thank my noble friend Lord Hodgson for this amendment on franchises and the noble Lord, Lord Berkeley, for his intervention. Pub franchises are of course covered by these measures because they fall within the definition of a tied pub in Clause 65. I understand my noble friend’s argument that a pub franchise agreement based on a share of turnover, rather than a tied rent, can lead to a better alignment of interests between a pub company and a tenant.

However, there are other aspects of the pub company and tenant relationship that can lead to unfairness, in the same way as for more traditional tied pubs. The Pubs Code includes transparency protections for tied tenants to ensure that they are clear as to what they are signing up to. We believe that these protections and others in the code should be available for all tied pub tenants, including those with a pub franchise agreement. I can, however, provide some reassurance to my noble friend. If, as he says, price increases make no impact on the tenant in a franchise agreement, the MRO-only trigger for pricing will never apply to a franchise agreement. Should a franchisee exercise the MRO option the pub company will still be able to benefit from the stocking requirement, so the tenant could still be required to stock its beer and/or its cider. The pubs company’s obligation to provide services as part of the franchise agreement would of course fall away.

I am, however, afraid that we believe that to exempt franchises would leave a loophole in the legislation. Tied pubs could be converted to franchise pubs to gain exemption from the code. If pub franchise agreements seek to reduce some of the risks of the tied model for

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tenants by revenue-sharing, as my noble friend Lord Hodgson explained, we would welcome that. One would expect such agreements to be less likely to fall foul of the Pubs Code. In turn, one would expect those tenants to be more satisfied and less likely to request the MRO option. This is not a reason, however, for removing franchise agreements from the scope of the legislation where we remain uneasy about opening up a loophole. I appreciate my noble friend’s amendment but I hope that he will feel able to withdraw it.

8 pm

Lord Hodgson of Astley Abbotts: My Lords, on a rather sour note, I am afraid that that was a very disappointing response. To say that it is a loophole, this arrangement with revenue sharing does not come within the tied tenancy arrangements, as envisaged. The tension in the tie is the rent you pay and the price you pay for the prize.

Lord Snape: I have never heard of one but I am sure the noble Lord can tell us.

Lord Hodgson of Astley Abbotts: There are probably 400 or 500. The idea is that it is a very easy way for a tenant to start in the pub trade and he shares the risk as he has a revenue-sharing arrangement. Unless the Government say that they will require McDonald’s and others to offer other people’s products, there is no argument for discriminating against pubs that are franchises as long as they have franchises that match what happens in McDonald’s, pizza franchise companies and the coffee companies.

It is just a way of driving the pubs into a corner and finding ways that they cannot live with. The arrangements are used frequently by many other industries, and if pubcos are to prosper they must be able to use similar new developments and not be trapped in what is essentially a framework that has existed for hundreds of years. It was an innovative idea by pubcos to get away from the problems that have bedevilled us all this afternoon. I shall come back on this strongly as it has been too quickly and too easily brushed aside. But, for tonight, I beg leave to withdraw the amendment.

Amendment 96 withdrawn.

Clause 67 agreed.

Clause 68: Power to grant exemptions from Pubs Code

Amendment 96ZA agreed.

Clause 68, as amended, agreed.

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Clause 69: Interpretation: other provisions

Amendments 96ZB to 96ZJ agreed.

Clause 69, as amended, agreed.

Clause 70: Regulations under this Part

Amendment 96A not moved.

Clause 70 agreed.

Clause 152: Consequential amendments, repeals and revocations

Amendments 97 and 98 agreed.

Clause 152, as amended, agreed.

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Amendment 99 agreed.

Clause 153: Transitional, transitory or saving provision

Amendments 100 and 101 agreed.

Clause 153, as amended, agreed.

Clause 154: Supplementary provision about regulations

Amendment 101A agreed.

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Clause 154, as amended, agreed.

Clause 155 agreed.

Clause 156: Extent

Amendment 102 agreed.

Lord Mendelsohn: My Lords, I guess that the least welcome comment would be, “It may be a one line clause but I have seven reasons for it”.

This is a very simple provision. Many Scottish Members of the other House, including members of the nationalist parties, voted to pass the code on the basis that the Scottish Parliament would have an off-the-shelf code to implement in their own jurisdiction should they so wish. This amendment ensures that this option stays open.

It is right that it should be for Holyrood to decide. It is a devolved matter for which they have responsibility. While it does not form part of the legislative consent memorandums under consideration by the Scottish Parliament on the measures in the Bill that the Scottish Government may be looking at, it was felt worthwhile to make this provision possible so that it would be plausible for them to do so in the circumstances that they so wished. There are many in Scotland who have reported that there may be some interest in this, and, again, that is not a matter for us. I am very pleased to see the noble Earl, Lord Lindsay, in his place. He and many others have been attuned to what is discussed there. If we amend this sensibly and well, we will be in a position to have something which, in the circumstances that the Scottish Parliament would think this is the right thing, they would be able to use. I beg to move.

The Earl of Lindsay: I am very much hoping that my noble friend will be able to reassure us that there are and have been instructive discussions with the Scottish Government on this point and that the dialogue with the Scottish Government has not come too late in the day for a co-ordinated cross-border approach, either via a Sewel Motion in this Bill or via parallel legislation introduced in Holyrood. Reassurance on these points is important in the context of this Bill, but it also has a wider importance.

Just last week, the Government published the document, Scotland in the United Kingdom: An enduring settlement, in which they stressed that it was essential that there was effective intergovernmental working

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and close collaboration between the United Kingdom and Scottish Governments. That statement restated an important recommendation from the Smith commission report, published in November 2014. That, in turn, restated a central recommendation of the Calman commission in 2009, on which I sat. This is the reason for my interest in my noble friend being able to reassure us that there has been timely, constructive dialogue between London and Edinburgh on this Bill and on this particular point.

Baroness Neville-Rolfe: My Lords, I thank the noble Lord for his amendment and for giving me the opportunity to say something about the application of these measures in Scotland. I am delighted to hear from my noble friend Lord Lindsay. I have discussed this matter with him and the noble Lord, Lord Reid, outside the Committee. The measures in Part 4 of the Bill apply to England and Wales only, of course. This is because regulation of tied pubs is a devolved matter in Scotland and it is for the Scottish Government to make their own legislation. Should they decide to legislate, they would not need any additional powers to be conferred by the UK Government.

My honourable friend Jo Swinson has recently written to the Scottish Minister for Business, Energy and Tourism encouraging the Scottish Government to consider bringing forward their own legislation in this area. My officials stand ready to assist as necessary. We understand that the Scottish Government have been engaging stakeholders from all sides of the debate and are considering whether there is evidence for a similar intervention in Scotland. I hope that the noble Lord will, therefore, accept that his amendment is not required.

Before I sit down, as this is the final day of the Committee, I should like to take a brief moment to put on record my thanks at the end of what—for some of us—has been a dry January, which has rightly ended with us talking about beer. First, I would like to thank all the patient Chairs of our Committee and those behind the scenes: Hansard, the clerks and the doorkeepers who have helped ensure our debates run smoothly and finish on time. I am also very grateful to my noble friends Lord Popat, Lord Newby and Lord Nash, on this side of the House, for their support in steering this Bill through Committee, and to my noble friend Lord Stoneham for being so loyal an attendee.

Furthermore, I would like to thank officials from the nine government departments who have been here to support the Government: BIS, the Treasury, HMRC, the Department for Education, UK Export Finance, DCLG, the Cabinet Office, the Ministry of Justice and DWP. We even talked about Gibraltar on the day that the noble Lord, Lord Mendelsohn, went missing and I would like to congratulate him on the refreshing new perspective he has brought to our work. I would also like to say how glad I was to see the noble Lord, Lord Stevenson, back today. I know he has been ill and we have had great collaboration with him and his colleagues.

Most importantly, I thank the noble Lords opposite, and all noble Lords who have been involved in the Committee, for their contributions to our debates. We

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have scrutinised the Bill in full, with some good and thorough debate. I have welcomed the spirit of co-operation that has been apparent even today. This is a vital Bill because small businesses are the engine of Britain. This Bill will help them innovate, grow and compete in many ways—from prompt payment to access to Government contracts. I look forward to noble Lords’ support for the Bill in its remaining stages to ensure that it reaches the statute book this spring.

Lord Mendelsohn: My Lords, I thank the Minister for her reply. On our amendment, all I would say is that between now and Report we will have some indication of where the Scottish Government are going, and we may well return to it in due course. At this stage, we would be very interested to hear her response.

I say from this side a strong thank you to the Chairmen, doorkeepers, officials, Hansard, and everyone else who has helped with these proceedings, and to colleagues for being such an interesting group in getting to grips with the Bill.

This is done in a spirit of co-operation. There are many occasions in politics where we are at daggers drawn, and many on which we find common cause. Sometimes we are in the middle. This is one where we are rather more towards one pole than the other. Our biggest criticism of the Bill is that it does not go far enough, but it would be churlish to say that that is a reason why we should not give it a great deal of co-operation. In that regard, I thank the noble Lord, Lord Popat, and the Minister, the noble Baroness, Lady Neville-Rolfe, for their contributions to the debate. I hope that in the weeks we have, on some of the more interesting issues, we can continue that spirit of co-operation. I beg leave to withdraw the amendment.

Amendment 102ZA withdrawn.

Clause 156, as amended, agreed.

Clause 157: Commencement

Amendment 102A agreed.

Amendment 102B not moved.

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(b) on 31 July 2016, for all other purposes.”

Amendments 103 and 104 agreed.

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Clause 157, as amended, agreed.

Clause 158 agreed.

Bill reported with amendments.

Committee adjourned at 8.18 pm.