Inside Track by John Harrington
Many commentators doubted whether it would ever see the light of day. But the Government’s proposals to intervene in the pubco/tenant relationship in fact go further than most believed, and show a clear determination by Business Secretary Vince Cable to get tough on large tenanted pub companies and what he unambiguously calls their “exploitative financial practices”.
But despite the tough talk, some industry figures still believe that the measures could still be kicked into the long grass amid divisions in the Coalition and fears of inflicting more red tape and uncertainty on the sector (more on that later).
As expected, the Government has outlined details of its planned statutory code and adjudicator for tenanted and leased pub companies. But in many other respects, Cable and his team have extended the scope and depth of action that would bring a significant burden on large tenanted operators. As Punch Taverns said: “A founding commitment of the Coalition was to reduce regulation, but ministers now seem intent on wrapping Britain’s pubs in red tape.”
Let’s start with definitions. The original mooted aim was to apply the code to pub companies that own and operate more than 500 tenanted and leased pubs. This has been updated to “all non-managed pubs”, effectively taking in the one large free-of-tie leased pubco, Wellington, and on the face of it, the growing number of pubs run on franchise or franchise-style agreements.
The consultation says: “The proliferation of alternative business models, such as franchises and ‘tenancies at will’, adds further complexity to the issue. The risk of drawing a distinction is that pub companies might seek to circumvent the Code, avoiding its provisions, by making small contractual changes to their leases which would not in reality benefit tenants.”`
It’s likely that those large pubcos that operate franchises (and variations on the concept) will look to contest vigorously any accusation that such an agreement should be included. The rationale for including only companies with 500 or more pubs is that these have generated the greatest number of complaints, so if little evidence of discontent among pub franchisees can be found, this is surely a fact that large pub companies can exploit.
One area of clear and decisive action is on the machine tie. Under the plan, the Code would mandate that no product other than drinks should be tied - effectively outlawing the tie on AWPs. Pub companies can’t say they didn’t see this one coming. As the consultation states, four successive Parliamentary select committees into the sector have concluded that the machine tie serves no purpose.
The consultation says: “The lack of willingness by pub companies to act on this matter has led to a concern that even if the gaming machine tie were removed, some companies might respond by tying another product. The Government sees no good reason why any product unconnected to the core business of a pub or brewer - in other words, no produce other than drinks - should be tied and therefore proposes to mandate in the Code that no product other than drinks may be tied.”
Pub companies would need to produce some water-tight evidence of the benefits of the machine tie, or the damage done if it’s removed, if it wants to change the Government’s mind on this issue. This is likely to be among the industry’s biggest challenge as it puts together its response.
Beer flow monitoring is another area of decisive action. The consultation says there’s “no consensus as to whether the equipment is accurate enough to be used to determine whether a tenant is complying with purchasing obligations”.
It says that while it’s “entirely legitimate” for one party to a contract to seek to ensure that the other party complies with the terms of that contract, the tied model has operated since at least the 18th century and for the majority of that time modern flow monitoring equipment has not been available.
“It is therefore clearly possible to operate a tied estate and to enforce the tie without the use of flow monitoring equipment.
“The Government therefore considers that the simplest and fairest solution is to mandate in the Code that information obtained from flow monitoring equipment may not be used for the purpose of determining whether a tenant is complying with purchasing obligations and that it may not be used or considered as evidence when enforcing purchasing obligations.”
The Government has acknowledged that other areas will be less easily to act on. Arguments for a mandatory free-of-tie option, for example, are “finely balanced” and the Government highlighted some unintended consequences of the move, which include potentially undermining the route to market for small and medium-sized brewers. Further research will be commissioned into the issue, and it’s far from clear whether this idea will ever be implemented.
All of these issues will be taken into account under the broad principle that a tied tenant should be no worse off than their free-of-tie counterpart. This would be calculated by a combination of dry rent, wet rent and the countervailing benefits of the tie in terms of pubco support. Pubcos will surely highlight the many support initiatives that they’ve put in place in recent years to help their tenants during the economic downturn.
Pub companies will doubtless point to CGA figures that show closure rates are higher among free-of-tie pubs (4.3% against 4.5%, according to the most recent survey between March 2010 and September 2012). The consultation adds: “The ‘net closure’ is the more appropriate statistic to use as it takes into account ‘churn’, where pubs close for a short period then reopen. However, if one uses gross closure figures then proportionately even more free of tie pubs are closing, 3.4% versus 5%.”
So what, in addition to the above, are the potential unintended consequences of the Government’s actions? One fear is that, if the overall rent paid on tenanted pubs effectively falls, as well as hitting pubcos in the pocket this would put commercial free-of-tie landlords at a competitive disadvantage.
Either way, a number of industry figures believe that the proposals will not end up coming into law. The issue is headed by the Liberal Democrats in Government - Cable and business minister Jo Swinson - and supported from the sidelines by vociferous pubco critic and chairman of the All-Party Parliamentary Save the Pub Group Greg Mulholland MP. The Liberal Democrats were the first of the big three main parties to say they supported legislative action on the tie before the last General Election.
In contrast, their Coalition partners are understood to be much less keen, with Chancellor George Osborne in particular loathed to add new layers of red tape to an industry that has shown itself to be such an effective creator of jobs.
The coming weeks and months will see both sides of the debate focus their lobbying efforts on bringing the best possible outcome. Cable’s determination shouldn’t be underestimated, nor that of anti-pubco campaigners. But the pub companies and their representative body the British Beer & Pub Association have shown that they have the ear of those in power, as seen by their recent success on the beer duty escalator and warm words from Osborne during the recent visit to Marston’s brewery.
There’s still all to play for. What this means for trade unity, however, is another question.
