Enterprise Inns and Punch Taverns have described the inclusion of a Market Rent Only option in the pubs code as a serious threat to the industry.
During yesterday’s final reading of the Small Business, Enterprise and Employment Bill an amendment to include MRO within the code was voted through with a majority of 15.
Enterprise chief executive Simon Townsend said: “The Government completed a thorough and extensive review of how best to enhance protection for tied tenants. As a result, it rejected the “market rent only” option as damaging to pubs, communities and the wider industry. Independent economic research, commissioned by the Government, found that a “market rent only” option would lead to widespread pub closures, significant job losses and reduced investment in the sector. This amendment is a disproportionate response which proposes fundamental change that is wholly contrary to the findings of the consultation, from which the Bill was drawn up.
“We continue to believe the tie offers the best operating model for the vast majority of our publicans and, as we made clear in reporting our Preliminary Results yesterday, we take a flexible approach to all our lease and tenancy agreements and the proactive management of our wider property portfolio. In light of yesterday’s vote we will continue to assess all options to safeguard the interests of both our publicans and shareholders. In the meantime we will monitor the situation closely and await the Government’s response to this unwelcome development.”
Punch Taverns released a statement saying the bill in its current form would “have significant adverse consequences for Britain’s community pubs”.
It stressed the Government’s own research had predicted MRO would result in between 700 and 1,400 more pubs closing with 3,700 to 7,000 job losses.
It added: “Furthermore, we believe that the amendment would be likely to have the effect of reducing pub investment, reducing consumer choice and exposing tenants to higher fixed rents, reduced levels of support and greater risk of failure.
“Punch’s view is that the amendment would lead to the creation of an unworkable two tier economic market and would be contrary to existing legal contracts and property rights. It also runs contrary to the OFT’s view when it considered a super-complaint from CAMRA in 2010 and concluded that tied tenants were able to compete effectively and that the commercial interests of pub companies and their tenants were aligned.
“We are currently considering the potential impact of the amended Bill on Punch, including the implications for our substantial pub investment program and our disposal plans.”
Geof Collyer, of Deutsche Bank, said supporters of MRO should be “careful what they wish for”.
He added: “Around 1%-2% of licensees ask for a free-of-tie option each year from ETI. The vast majority appreciate the safer option of ‘low fixed plus turnover rent’, because it is better for cash flows. Breaking the tie in the way proposed by the above amendment will have significant consequences for the industry – which is why the Government rejected the concept when it was proposed back in June 2014. Its own analysis suggested that the MRO would accelerate pub closures and job losses.”
He concluded: “The MRO is against both UK Government policy and competition law here and in the EU, and we would expect the pub industry to appeal this amendment all the way through the courts. ETI also has the ‘nuclear’ option of converting into a real estate investment trust (REIT).”
Douglas Jack, of Numis, branded the move “a law full of unintended consequences”.
He said: “On rent review, Punch and Enterprise could consider transferring pubs into non-rent franchise pubs (why apply ‘market rent’ to pubs that pay no rent?). Alternatively, Enterprise and Punch could compensate for the loss of income by cutting capex and support (reducing pub viability) if tenants remove the tie (in order to purchase cheap beers). We estimate this capex and support are worth a combined £20k/pub pa, financed by the central purchasing power that the MPs’ vote has endangered.”
David Forde, UK managing director of Heineken,said: “What the Great British pub needs most is sustained investment to improve standards and attract more customers. If enacted, the Market Rent Only option would effectively break the beer tie, threaten vital investment and damage pubs. This year our Star Pubs & Bars business invested £18m to improve our pubs. We know that with the right lessee, in the right pub, backed by the right investment our model benefits lessees, the community and us as Brewer. These changes would threaten that partnership and make it more difficult for people to enter the market and own their own pub. We urge Parliament to think again before this poorly thought out proposal becomes law.”
In scenes described by Labour as “a complete and utter shambles” the Government produced an eleventh hour amendment that sought to introduce a review two years after the bill is made law to examine the need for MRO. This amendment also suggested lowering the threshold for what constitutes a pub-owning company to one with 350 or more tied pubs.
The defeat of that amendment means the bill goes forward to the House of Lords as it was tabled by the Small Business Bill Committee – meaning it only relates to companies owning 500 or more tied pubs.
Yesterday successful New Clause 2 amendment, tabled by Lib Dem MP Greg Mulholland, was supported by 284 MPs, including 17 Conservatives.
The clause in full reads:
Pubs code: market rent only option for large pub-owning businesses
(1) The Pubs Code shall include a Market Rent Only Option to be provided by large pub-owning businesses in respect of their tenants and leaseholders.
(2) A Market Rent Only Option means the right of the tenant, or leaseholder, of a pub owned by a large pub-owning business, to be offered such tenancy or lease in exchange for an independently assessed market rent paid to the pub-owning business and, for the avoidance of doubt, not thereafter being bound by “a tie”, meaning an agreement meeting, in whole or in part, Condition D as defined in section 63(5) of this Act (obligation to buy from the landlord, or from a person nominated by the landlord, some or all of the alcohol to be sold at the premises).
(3) For the purposes of this section, the definition of Condition D in subsection (2) is to be interpreted to include an obligation to buy or contract for goods and services other than alcohol.
(4) For the purposes of this section, the definition of a “large pub-owning business” is a business which, for a period of at least six months in the previous financial year, was the landlord of—
(a) 500 or more pubs (of any description); and
(b) one or more tenanted or leased pub.
(5) The Pubs Code may include provisions to permit a brewery which qualifies as a large pub-owning business to continue to require that specified brands produced by that brewery (required products) are sold within its tenanted or leased pubs—provided that such tenants and leaseholders are free to purchase such required products from any supplier.
(6) The Pubs Code shall contain provisions requiring that the offer of a Market Rent Only Option to a tenant—
(a) at the point of lease, tenancy contract or other agreement renewal, or at rent review or five years from the date of the previous rent review;
(b) when the large pub-owning business gives notice of, or imposes, (whichever is the earlier) a significant increase in the price at which it supplies products, goods or services (falling under subsections (2) or (3)) to the tenant;
(c) when a large pub-owning business implements, or gives notice of, a transfer of title;
(d) when a large pub-owning business goes into administration; or
(e) upon an event outside of the tenant’s control, and unpredicted at the time of the previous rent review, that impacts significantly on the tenant’s ability to trade.
(7) The terms of an offer under subsection (5) shall include provision for a 21 day period of negotiation, commencing from the tenant giving notice of an intention to pursue a Market Rent Only Option, in which the large pub-owning business and the tenant may seek to negotiate a mutually agreeable Market Rent Only settlement.
(8) Following the negotiation period under subsection (7) there shall follow a 90 day period of assessment. In this period—
(a) an independent assessor shall be appointed with the agreement of both parties by joint private instruction and on the basis of an equal apportionment of costs; and
(b) under arrangements and criteria that the Adjudicator shall establish, such an assessor shall be—
(i) independent of both parties; and
(ii) competent by virtue of qualification and/or experience.
(c) if the business and tenant cannot agree on an appointee then a person shall be appointed, on the application of either party, under arrangements established by the Adjudicator;
(d) the appointed assessor shall then assess the market rent for the property operating as a pub with no “tie” as defined in subsection (2) and submit to both parties the resulting sum for such a rent; and
(e) at the time of the three month assessment period, the tenant shall have the right to pay no more than the sum determined under paragraph (d) to the pub-owning business and, if previously one party to a “tie” as defined in subsection (2), shall no longer be bound by it.
(9) The Pubs Code shall contain such measures as ensure that—
(a) the Market Rent Only Option is conducted in accordance with timing provisions and procedures, in accordance with RICS guidance, as specified in the Pubs Code; and
(b) large pub-owning businesses are prohibited from acting or discriminating against any of their tenants who choose the Market Rent Only Option.
(10) The Secretary of State shall confer on the Adjudicator functions and powers in relation to the Market Rent Only Option, that include—
(a) determining what constitutes a significant increase in price, as mentioned in subsection (6)(b) in the event of a dispute between tenant and business;
(b) adjudicating in disputes concerning the process or outcome of the market rent assessment; including the power to set the market rent if the Adjudicator deems the process or decision to have been flawed; and
(c) receiving, investigating and adjudicating in relation to complaints made under subsection (9)(b).
(11) The Secretary of State shall make provisions for the implementation of the following measures in this section by regulations amending the Pubs Code. Such regulations shall be made under negative resolution procedure. The Secretary of State may make provisions changing the types of agreement that fall under subsection (2) by regulations. Such regulations shall be made under negative resolution procedure.”
